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Vol. 72, No. 7, July 1999

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Are Your Independent Contractors
Truly Independent?

Training. Independent contractors should be workers who neither need nor receive periodic or ongoing training from a particular company. Such training, if provided, indicates an employer-employee relationship. Moreover, if a company pays to train a worker through a third party, such as paying for professional development courses, an employer-employee relationship generally will be found. However, companies commonly provide some limited training to independent contractors, such as general orientation information or information on new product lines. Again, as with the instruction provided, the more detailed and comprehensive the training provided, the more likely it is that control exists.

Financial Control

Financial control refers to whether a company has the ability to direct or control the economic or business aspects of the worker's activities. Factors to determine whether financial control exists are: significant investment, unreimbursed expenses, services available to others, opportunity for profit or loss, and method of payment.

Significant Investment. Workers who purchase, rent, or lease their own equipment or office space to perform a particular job are more likely to be independent contractors, whereas employees generally have equipment and office space provided to them by their employers.

Unreimbursed Expenses. Workers who pay for their own supplies generally are independent contractors. Workers who receive such materials from the company, or who have such costs reimbursed, are likely to be employees.

Services Available to Others. Workers marketing their services to the public are likely to be independent contractors. Although employees who "moonlight" may have more than one employer, workers with a regular practice of working for different companies generally will be labeled independent contractors. This is particularly true if a worker provides services to competing companies in the same field, and even more so if a company has a policy prohibiting its employees from providing services to competitors.

Opportunity for Profit or Loss. If the worker makes decisions affecting his or her bottom line, the worker likely has the opportunity for a profit or loss, and will be considered an independent contractor. Examples of decisions that may affect a worker's bottom line include the type and quantity of inventory to purchase, the amount of capital investment, and where and whether to purchase supplies or equipment.

Method of Payment. Generally, compensation by the hour, day, or week is evidence of an employer-employee relationship, while payment of a flat fee is evidence of independent contractor status.

Relationship of the Parties

The final category of evidence examines what the parties intend their relationship to be. It must be emphasized that the parties' intent, while persuasive, is not controlling. Even if both parties agree in writing that an independent contractor relationship exists, a court or the government could find otherwise.

A written agreement setting forth the terms of the independent contractor relationship is one of the clearest indicators of the parties' intent. Similarly, the worker's incorporation of his or her business, even if the worker is a sole proprietor, demonstrates an intent to be independent. Moreover, the exclusion of a worker from employee benefit plans and the provision of a Form 1099 rather than a Form W-2 demonstrate the parties' intent to create an independent contractor relationship.

In addition, the terms and length of the relationship may be important factors. A company's absolute right to terminate the worker without penalty, and a worker's right to quit, are generally evidence of an at-will employer-employee relationship. Conversely, an independent contractor relationship generally can be terminated only subject to certain limitations, sometimes including payment of a penalty. Moreover, independent contractor relationships generally exist for a definite term. The longer and more indefinite the term of the relationship, the more likely that an employer-employee relationship will be found.

Finally, if the work performed by the worker is part of a company's integral business activity, it is likely that the worker is an employee. "Integral" in this context means that the work or project is part of the business's regularly conducted activity. For example, a store may retain workers to install electricity and plumbing in its building. This work, while necessary to the functioning of the store, is not the store's regular business activity. These workers are independent contractors.

Jordan W. Siev and Kirsten M. Eriksson are members of the New York office of Anderson Kill & Olick P.C., whose practice includes representing companies and fiduciaries in matters involving the employee/independent contractor distinction.

Some companies believe they can eliminate the problems created by this issue by hiring their independent contractors through a temporary help agency. This is only partly true. If the temporary agency is no more than a shell with which the worker has little or no contact, and the trappings of an employee-employer relationship exist between the worker and the company, the relationship with the temporary agency may be disregarded.¹ To prevent this result, the company should not recruit specific workers, but should use whatever workers are provided by the agency. The company should not train the workers extensively, and should not use the same workers for an extended period. Finally, the workers should not be given additional tasks or projects that go beyond their original assignments.

Conclusion

The use of independent contractors can be a valuable way for companies to decrease costs. However, the use of independent contractors is not without its dangers. Companies must be careful to ensure they do not run afoul of the law and misclassify employees as independent contractors. Companies should scrutinize their practices following the above guidelines, periodically audit their independent contractor relationships, and consult with a professional about any concerns of misclassifying independent contractors.

Endnotes

¹ See, e.g., Vizcaino v. U.S. District Court for the Western District of Washington, 1999 U.S. App. Lexis 9057 (9th Cir. May 12, 1999) (later proceeding in Microsoft holding that Microsoft can still be employer of workers from temporary agency).