Correctly Classifying Independent Contractors

Correctly Classifying Independent Contractors

Written by Desiree J. Nordstrom, Founding Partner and Attorney, Overflow Legal Network, LLC.

The use of independent contractors can dramatically reduce the cost and headache associated with hiring employees. In the legal industry, independent contractors cost law firms significantly less in comparison to the total cost of hiring employees (benefits, insurance, etc.).  However, the work product produced is comparable to, and often better than, that produced by full-time employees.

Independent contractors can further reduce firms’ employment costs because, when hiring independent contractors, firms are not required to provide certain statutory employment benefits, such as overtime payments or minimum wage obligations, workers’ compensation coverage, unemployment benefits, or withholding income taxes from payments for services.  Independent contractors also benefit from this arrangement because they can enjoy more freedom and flexibility in their schedules and some tax advantages.

If an employer decides to engage an independent contractor, they must remember that the classification of “independent contractor” is highly scrutinized by state administrative agencies and the Internal Revenue Services (IRS).

The rules defining the difference between an employee and independent contractor are not clear cut. There are guidelines set out by federal and state agencies and variations from one court ruling to the next. Regardless of the lack of uniformity, failing to navigate local and federal requirements has resulted in costly and unpleasant consequences for businesses.

Despite the differing tests, there are some common rules of thumb that help separate independent contractors from employees.

WRITTEN AGREEMENT

When an employer engages an independent contractor, it should do so under a written agreement. The agreement should state that the individual is not an employee, that he or she will be issued a 1099, that he or she is not covered by workers’ compensation and that he or she is not entitled to health or retirement benefits. But employers must know that having this agreement does not ensure that governing bodies will find the worker to be a contractor if that is challenged. As such, employers must be vigilant to ensure workers remain correctly classified through regularly auditing the relationship.

CONTROL

The factor that usually garners the most weight is the amount of control the employer maintains over the independent contractor. Is the employer directing the details of the work being completed? The employer should not control the final results or the methods to that end.

TIME

An independent contractor is the master of his or her own time and works the days and hours he or she chooses.[1] Also, they work for a specific period of time, as opposed to an indefinite period. There should be project beginning and end dates set.

MANNER

If the contractor receives specific instructions on the manner in which the task is executed, they may actually be misclassified. This includes details like the sequence in which the work should be performed.

TOOLS

The employer shouldn’t provide the instrumentalities and tools that are used to complete the project, including a computer, cell phone and other items. Employers should not require the contractor complete work in their office. Instead employers should allow contractors to work remotely. Also, the employer should not control whether the contractor can be assisted in completing the project.

State and federal agencies make a great effort to crack down on worker misclassification. Employers should examine their working relationships to ensure independent contractors are classified correctly and put in place safe guards to ensure compliance.

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[1] The IRS does recognize that some positions mandate work being done during a certain time period.