State agencies: Independent contractor criteria

Individuals who are "independent contractors" are not considered employees for wage and hour purposes, nor for certain tax purposes. Unfortunately, the fact that a federal agency like the Department of Labor or the Internal Revenue Service (IRS) agrees that a relationship qualifies for an "independent contractor" designation does not prevent a state agency from finding an "employment" relationship.

The state agencies most often involved with independent contractor status include tax agencies, unemployment insurance agencies, workers' compensation agencies, and state wage and hour agencies. Since different laws are involved, it is possible that the same individual will be considered an employee under one law and an independent contractor under another law. Because the potential liabilities and penalties are significant if an individual is wrongly classified as an independent contractor and later found to be an employee, each such relationship must be thoroughly researched.

There is no single factor for determining whether an individual is an independent contractor or an employee. An individual will be considered an employee where the employer exercises all necessary control by direct or indirect means over the work details of the individual. The IRS guidance offers more information on this. In addition, the following factors are generally considered in determining an individual's status as an independent contractor (many are similar to the IRS criteria, but some state agencies may apply additional criteria):

1. The individual performs services in an occupation or business distinct from that of the principal;

2. The work performed is not part of the regular business of the principal;

3. The individual supplies his/her own instrumentalities, tools, and work place;

4. The individual has made a significant investment in the equipment or materials required for his or her task(s);

5. The individual's services require a unique skill in a particular occupation;

6. The individual's occupation in the locality is usually done by a specialist without supervision;

7. The individual's opportunity for profit or loss depends on his/her own managerial skill;

8. The time for which the services are to be performed is reasonably limited to the task(s) for which the individual was hired;

9. The working relationship between the individual and the employer is reflective of the time allotted to perform the task(s) for which the individual was hired;

10. The method of payment is time certain or project specific;

11. The parties do not believe they are creating an employer-employee relationship;

12. The individual has the right to control and discretion as to the manner of performance of the contract, as well as the means by which the work is accomplished;

13. The individual is customarily engaged in an independently established business (and usually has bank accounts in the name of the business, where payments are made in the name of the business rather than the name of the individual);

14. The individual's independent contractor status is bona fide and not a subterfuge to avoid employee status;

15. The individual has a substantial investment in the business other than personal services;

16. The individual holds him/herself out to be in business for him/herself (and often has a Federal Employer Identification Number (FEIN) rather than using a Social Security number);

17. The individual bargains for a contract to complete a specific project for compensation by project rather than by time;

18. The individual has control over the time and place the work is performed;

19. The individual hires his/her own employees, or has the right to do so;

20. The individual holds a license to perform the work (may not be applicable in all cases);

21. The relationship is not severable or terminable at will by the principal, but instead gives rise to an action for breach of contract.

Even where there is an absence of control over the details of the work, an employer-employee relationship can be found if:

• The principal retains pervasive control over the operation of the whole,
• The worker's duties are an integral part of the operation, and
• The nature of the work makes detailed control unnecessary.

For instance, cab drivers who are dispatched by the company and drive a company vehicle (even under a rental agreement) might be "employees" rather than independent contractors. The reason is that the service of driving a cab is integral to the business, and the company exercises some control as to job assignments (even if there is no direct oversight throughout the day).

In addition, the existence of a written agreement intending to establish an independent contractor relationship is not sufficient, nor is the fact that a worker is issued a 1099 form rather than a W-2 form an indicator of independent contractor status - an employer who mistakenly designates an independent contractor relationship may have both elements present, but the individual could still be an employee.