Worker Classification: Employee vs. Independent Contractor
The misclassification of employees as independent contractors is fairly common these days and causes countless problems. Some employers misclassify employees as independent contractors due to a misunderstanding of the law. Others intentionally misclassify workers to minimize the employer’s financial obligations, such as (a) minimum wage and overtime compensation; (b) withholdings taxes; (c) workers compensation insurance; and (d) retirement benefits and health insurance plans. Misclassification usually becomes an issue after a worker seeks remedies traditionally available to an employee, such as workers compensation or unemployment. At that point, the classification decision may be evaluated by a government agency or the worker’s attorney. If there has been a misclassification, the employer can be subject to investigation, assessments, penalties, and litigation.
There is no absolute rule to determining whether a worker is an employee or an independent contractor. The facts of each case must be examined to determine the correct classification. The primary test in determining whether an employer-employee relationship exists is whether the alleged employer has the right of control and supervision over the work of the alleged employee and the right to direct the manner in which the work is to be performed, as well as the result which is to be accomplished. Actual interference or exercise of control by the employer is not necessary. Rather, it is the existence of the right or authority to control which renders one an employee rather than an independent contractor. Other factors that may be considered include:
- Whether training is provided by the employer;
- Whether the worker’s services are integrated into the employer’s business;
- Whether the services must be provided personally by the worker;
- The length of relationship between the employer and the worker;
- Whether the employer provides full-time work for the worker;
- Whether payment is by the hour, day, or job;
- Whether the employer pays business or travel expenses for the worker;
- Whether the employer provides tools, equipment, and materials to the worker;
- Whether the worker can incur a profit or loss;
- Whether the employer has the right to terminate the worker; and
- Whether the parties believe they have an employer-employee relationship
For an employer, proper classification decisions help prevent costly litigation and tax consequences. For a worker, making sure that you are being correctly classified can also prevent adverse tax consequences and can ensure that you are being treated fairly. If you need advice about worker classification, you should contact competent employment law counsel.