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Clues that a worker might not be an independent contractor

['Wage and Hour']
Clues that a worker might not be an independent contractor
  • Four factors can distinguish an independent contractor from an employee, though the overall relationship must be assessed.
  • State laws can characterize a worker as an employee (not an independent contractor) for purposes of obtaining various benefits.

The U.S. Department of Labor (DOL) and equivalent state agencies have been cracking down on employers that improperly classify workers as independent contractors. While the overall relationship must be evaluated to determine the worker’s status as an employee or contractor, there are a few red flags to watch for. If an employer claims to have an independent contractor relationship, but the relationship involves any of the following, that employer may have to reclassify the worker as an employee:

  • The employer establishes the expected working hours. An independent contractor decides how and when to perform work. A company may set a deadline for completion of a project, but the contractor determines how to devote time and resources to achieve that outcome. If an employer sets the expected hours, a substantial amount of control has been taken from the worker. In fact, an employment relationship can be found if the employer has the right to control working hours, even if that control is not exercised.
  • Wages, salary, or commissions are paid by the employer. A contractor should be able to make a profit or suffer a loss after balancing income and expenses. If someone is working for wages or commissions, the worker’s income depends on the amount of time or effort the individual gives to the company. While some contractors are paid by the hour (such as lawyers who bill by the hour), most are paid by the job, often at a fixed rate (e.g., a mechanic who replaces brakes on a car). If the worker is paid using a system traditionally used to compensate employees, such as commissions on sales, then an employer probably cannot justify independent contractor status.
  • The employer did not contract for a specific project. A contractor is normally used for a specific project, such as the mechanic who replaces brakes. Even a lawyer who bills by the hour is engaged to handle specified cases. Also, contractors will usually provide a service that a company does not normally offer. If a worker is hired for an indefinite period to provide ongoing services (particularly when those services are part of a company’s core business, such as sales), the employer has probably hired an employee.
  • The worker is asked to sign a non-compete agreement. An independent contractor must actually be independent. The contractor will normally have a business location, maintain bank accounts in the name of the business, file taxes as a business, and provide services to the market. Having a worker sign a noncompete agreement would strongly suggest the individual is an employee because it prevents the individual from offering services to other potential clients.

Facts of lesser or no importance

The following typically provide less useful evidence, and are generally already reflected in previous sections:

Part-time or full-time work

An independent contractor may work full-time for one business either because other contracts are lacking; because the contract requires a full-time, exclusive effort; or because the independent contractor chooses to devote full-time effort to a particular project. Also, many employees “moonlight” by working for a second employer. As a result, whether services are performed full-time for one business is not useful evidence.

Place of work

Whether work is performed on the business’ premises or at a location selected by the business often has no bearing. In many cases, services can be provided at only one location. For example, repairing a leaky pipe requires a plumber to visit the premises where the pipe is located.

The place where work is performed is most likely to be relevant where the worker has an office or other business location. However, such evidence was already considered in evaluating significant investment, unreimbursed expenses, and opportunity for profit or loss.

Hours of work

Hours of work has already been considered in connection with instructions. Some work must, by its nature, be performed at a specific time. Also, modern communications have increased the ease of performing work outside normal business hours.

Dual status/Split duties

A worker may perform services for a single business in two or more separate capacities. A dual-status worker may perform one type of service as an independent contractor but perform a different service for the same business as an employee.

State law characterization

State laws, or determinations of state or federal agencies, may characterize a worker as an employee for purposes of various benefits (e.g., unemployment benefits and workers’ compensation). These characterizations should be disregarded for Internal Revenue Service (IRS) purposes because they may use different definitions or be interpreted to achieve particular policy objectives.

Because the definition of employee for these purposes is often broader than under common law rules, eligibility for these benefits should be disregarded in determining worker status under IRS criteria. However, employers may still need to consider them under state agency definitions.

Control and autonomy both present

Some facts may support independent contractor status while other facts support employee status. This is because independent contractors are rarely totally unconstrained, while employees almost always have some degree of autonomy. Look at the relationship as a whole and weigh the evidence to determine whether evidence of control or autonomy predominates.

For example, a business may require the worker to be on site during normal business hours, but has no right to control other aspects of how work is to be performed; the worker has a substantial investment and unreimbursed expenses combined with a flat fee payment; and contractual provisions clearly show the parties’ intent that the worker be an independent contractor. In this case, one would logically conclude that the worker was an independent contractor despite instructions about hours and place of work.