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Independent Contractor vs. Employee

By January 26, 2022February 10th, 2023No Comments
Independent Contractor vs. Employee

::pWhether a worker is covered by a particular law or is entitled to receive a particular benefit often depends on whether the worker is an employee or an independent contractor. In general, employment laws, labor laws and related tax laws do not apply to independent contractors. Some employers prefer to hire independent contractors to avoid the costs of employee benefits, unemployment compensation contributions and workersโ€™ compensation liability. This preference can lead employers to misclassify employees as independent contractors. In this article, we’ll compare Independent Contractor vs. Employee rules to give you a better understanding of how the two compare.

Misclassification Of Worker Status

Misclassifying employees has become an increasing concern for governments, courts and regulatory agencies. Employers that misclassify employees can be liable for expensive fines and litigation if a worker should have been classified as an employee and did not receive a benefit or protection he or she was entitled to receive by law.

Employers should make sure to determine the true nature of their relationships with their workers. This article provides information for employers on classifying workers correctly.

Classifying an individual as either an employee or an independent contractor is not a simple task. No standard test has emerged to determine the true character of an independent contractor relationship. In fact, employers may have to apply various tests to determine how issues of employment benefits, workersโ€™ compensation, unemployment compensation, wage and hour laws, taxes or protection under Title VII of the Civil Rights Act, the American with Disabilities Act (ADA) and the Family and Medical Leave Act (FMLA) affect their workforces. In addition, employers should be aware that state and local variations of these tests may also apply in certain situations.

The recurring theme in these tests is control. In different ways, these tests seek to determine the amount of control that an employer exerts over a particular worker or set of workers. Employer control can be classified into three categoriesโ€”behavioral control, financial control and the overall relationship between the parties.

The Common Law Agency Test

The common law test is also known as the agency test because it assumes that, unless there is a definition for โ€œemployee,โ€ โ€œemployerโ€ and โ€œscope of employment,โ€ these terms are best understood in the context of agency laws. Several courts have favored this test for issues related to the Copyright Act, Employee Retirement Income Security Act (ERISA) and National Labor Relations Act (NLRA).

The common law agency test requires an intense consideration of 13 different factors that individually may not determine the character of the relationship between the employer and the worker, but as a whole, allow for an understanding of how much control an employer exerts over a particular individual. These 13 factors, also known as the Reid factors, evaluate the following:

  1. The duration of the relationship between the parties;
  2. How much discretion the worker has over when and how long to work;
  3. The workerโ€™s role in hiring and paying assistants;
  4. The employerโ€™s right to control the manner and means by which the work is accomplished;
  5. The location of the work;
  6. The method of payment;
  7. The skill level required to complete the job or services;
  8. Who provides the tools and equipment to complete the job;
  9. How the employer reports payment of workersโ€™ compensation for tax purposes;
  10. Whether the employer is in business;
  11. Whether the employer provides employee benefits to the worker;
  12. Whether the employer has the right to assign additional projects to the worker; and
  13. Whether the work is part of the employerโ€™s regular business.

The Economic Realities Test

The economic realities test also requires a thorough analysis of the relationship between the parties, and evaluates the level of financial dependency that the worker has on an employer. Generally, under the economic realities test, the more an individual depends on an employer, the more likely it is that the individual should be categorized as an employee. The courts have favored this test when the term โ€œemployeeโ€ is used in a very broad sense; for example, in issues related to the Fair Labor Standards Act (FLSA) and the FMLA.

The economic realities test outlines several factors an employer may consider to determine the level of financial dependency. As with the common law agency test, one factor standing alone is not sufficient to establish dependency, but as a whole, these factors enable the employer to evaluate the nature of an employment relationship. These factors evaluate:

  1. The degree of the employerโ€™s right to control the manner in which work is performed;
  2. The degree of skill required to perform the work;
  3. The workerโ€™s investment in the business;
  4. The permanence of the working relationship;
  5. The workerโ€™s opportunity for profit or loss; and
  6. The extent to which the work is an integral part of the business.

The Hybrid Test

As the name suggests, the hybrid test combines elements of the common law agency and the economic realities tests. The factors under this test are a combination of the ones described above, but consider special details in the relationship between an employer and a worker, such as:

  • Does the individual’s occupation require expert supervision or can a specialist perform it alone?
  • Whether a termination procedure exists for terminating the work relationship and whether it resembles the procedure used for terminating employees
  • Whether the worker accrues time off
  • The partiesโ€™ intentions

Though some lower courts have used this test to deal with issues related to Title VII of the Civil Rights Act, the Age Discrimination in Employment Act (ADEA) and the ADA, the Supreme Court has criticized this approach and is leaning more toward using the common law test for similar issues.

IRS Test

The IRS has also developed its own test regarding whether an employment relationship exists between a worker and an employer, for purposes of determining tax liability of employers and individuals. Sometimes, people call the IRS test the control test. It categorizes factors from the common law test into three categories by expanding the test:

  • Sphere of behavioral control;
  • Financial control; and
  • Factors that determine the type of relationship that exists between parties.

For more information, instructions and commentaries on this test, see the IRS publication on its website.

Constant Re-evaluation

Employers must evaluate current working relationships on a regular basis. Working relationships are dynamic, and the changes that occur over time may impact the nature of the relationship between a worker and an employer. Employers that do not review the nature of their relationships with independent contractors run the risk of incurring expensive fines and litigation.

LINKS AND RESOURCES

Curious what the implications are for your insurance if you hire independent contractors? Call Oโ€™Connor Insurance Associates today to discuss how it will impact you at 704-510-8884.

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