Independent contractors

Scope

When hiring an independent contractor, employers need to define the nature of the employment relationship under the regulations of several agencies.

Regulatory citations

• None

Key definitions

• None

Summary of requirements

Safety first. Both employers bear responsibility for safety and training requirements.

Contractor responsibilities may include assuring that employees are trained in the work practices necessary to perform the job safely, and informing employees of safety rules at the host facility.

Host employer responsibilities may include providing a copy of the facility’s written safety policies and procedures, and designating a representative to coordinate and communicate all safety and health issues with the contractor.

Employee or independent contractor? When hiring an independent contractor, employers need to define the nature of the employment relationship under the regulations of several agencies. These include:

• The Internal Revenue Service (IRS),
• State unemployment compensation agencies,
• State workers’ compensation agencies,
• State tax agencies, and
• The U.S. Department of Labor.

Each agency has different means of distinguishing between “employees” and “independent contractors.” This distinction is important because the status determines the host employer’s responsibilities. Employees must be handled differently than independent contractors. Note that different agencies may use different criteria to define the employment relationship. Thus, what one agency may define as an employer/employee relationship, another might define as an independent contractor relationship.

The IRS. Employers do not generally have to withhold or pay any taxes on payments to independent contractors. Employers must:

• Define the business relationship before determining how to treat payments for services. If an employee is incorrectly classified as an independent contractor, the employer can be held liable for taxes for that worker, plus a penalty.
• Consider all information that provides evidence of the degree of control and independence when determining whether the person providing service is an employee or an independent contractor, all information that provides evidence.

As a general rule, the employer has the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result. On the other hand, anyone who performs services is likely to be classified as an employee if the employer can control what will be done and how it will be done.

State unemployment compensation. Employers aren’t required to pay for unemployment insurance for independent contractors. As noted above, however, different agencies use different criteria to define an employment relationship. For example, the IRS might define a business arrangement as an independent contractor relationship. However, the state unemployment insurance agency may define it as an employer/employee relationship for which unemployment insurance is required. The same workers can be considered “independent contractors” by one agency (such as the IRS), and considered “employees” by another agency.

The best source of information is the state unemployment insurance agency. Be certain to understand how the relationship is defined before hiring an independent contractor. Clarify the relationship to avoid having an independent contractor apply for unemployment compensation for which you have paid.

State workers’ compensation. Employers aren’t required to pay workers’ compensation for independent contractors. However, as noted above, one government agency or entity might define the business relationship as “independent contractor” while another defines it as “employer/employee.” Thus, employers may need to provide workers’ compensation to “employees” (as defined under workers’ comp laws) even if those workers are considered independent contractors by other agencies.

The best source of information is the state workers’ compensation agency. Understand how the relationship is defined before hiring an independent contractor. Also, remember that workers covered by workers’ compensation can not otherwise sue their employer for injuries that happen on the job, but independent contractors who are not covered may be able to sue for such injuries.

State tax agency. Employers do not need to withhold state income tax from independent contractors. Again, the state tax agency may use different tests to define the employment relationship. The best source of information is the state tax board or state department of revenue.

The U.S. Department of Labor. The employer-employee relationship under the Fair Labor Standards Act (FLSA) is tested by “economic reality” rather than “technical concepts.” It is not determined by the common law standards relating to master and servant.

The U. S. Supreme Court has indicated that no single rule or test exists for determining whether an individual is an independent contractor or an employee under the FLSA. Among the factors which the Court has considered significant are:

• The extent to which the services rendered are an integral part of the principal’s business.
• The permanency of the relationship.
• The amount of the alleged contractor’s investment in facilities and equipment.
• The nature and degree of control by the principal.
• The alleged contractor’s opportunities for profit and loss.
• The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
• The degree of independent business organization and operation.

Such facts as the place where work is performed, the absence of a formal employment agreement, or whether an alleged independent contractor is licensed by state/local government may have a bearing on, but do not control, whether an employment relationship exists. Additionally, the Supreme Court has held that the time or mode of pay does not control the determination of employee status.

For additional information, see the Fair Labor Standard Act topic.