If It Walks Like A Duck ...

When is an independent contractor not an independent contractor (IC)? For the answer read on...

Many employers choose to hire ICs to work for them rather than hire the person as an employee because it can be a cost effective solution for their business. For example there are no workers compensation costs, payroll taxes or other potential liabilities that can go along with the employer-employee relationship. Also many employers want to try before they buy and sometimes use the IC relationship as a trial period to determine whether the IC will make a good employee. While all of these are sound business reasons, there are legal risks associated with hiring someone as an IC when in fact they should really be hired as an employee.

The decision of whether someone will be hired as an IC or an employee is not up to the employer or IC alone. There are many governing bodies that strictly monitor the use of ICs and have stringent definitions about who is an IC, including the IRS and the Department of Labor (DOL) to name a few. Unfortunately following these definitions is not simple because the guidelines from each governing body are not in sync with one another which can cause a lot of confusion for employers.

Below is the CliffsNotes version of some of the tests used to determine IC status (this is not a comprehensive list):

• Does the person have his/her own business? (EIN, business cards, etc.)

The more the IC looks like he/she has a business, the chances are better that he/she is truly an IC;

• Is he/she actively seeking new business?

If you are the ICs only client, this could be problematic. Very rarely does an individual who is truly in business only have one client;

• Does he/she use his/her own equipment to do the work for you?

If you provide the equipment it does not necessarily mean the individual is an employee but it can be an indicator;

• How much control do you (the employer) have over the individual doing the work?

The more control you have the more likely the person would be seen as an employee

You may be asking yourself, "what are the risks associated with misclassifying someone as an IC rather than an employee?" Here are a few:

• If the IC is injured at your location and then files a workers compensation claim this is a good indicator that the IC views themselves as an employee. If your workers compensation carrier rule that the IC should have been classified as an employee, not only are you on the hook for the claims related to the injury but the carrier could require that you pay for workers compensation insurance back from the time the IC began working with you;

• You could also receive fines from the state workers compensation division;

• Should the IRS discover an IC was misclassified, you could be responsible for the required payroll taxes since date of hire;

• If the DOL finds that an IC should have been classified as an employee, you could be responsible for retroactive overtime compensation if the position is an hourly one

Once you determine that the person you have hired truly is an IC here are a few steps to take that will define the IC relationship even further:

• The IC provides regular invoices for all agreed upon work;

• Hire an attorney to draft an agreement that outlines the relationship and terms that both you and the IC sign;

• Have the IC set work deadlines;

• The IC should receive a 1099

Bottom line, if it walks like an employee chances are it is an employee and not an independent contractor.

Useful link to the IRS guidance on independent contractors IRS site

This article is intended as information only and is not a substitute for legal or professional advice. For specific rules and regulations seek out the advice of an employment attorney.