For a variety of reasons, some employers prefer to hire independent contractors instead of employees. Many times, they see it as a way to save money on payroll taxes, unemployment insurance and other benefits federal and state governments require companies to provide to employees.

Yet, it can be a costly mistake to misclassify an employee as an independent contractor – an error that can result in heavy penalties and a nightmare of red tape if the Internal Revenue Service (IRS), state or federal employment agencies get involved.

Most of the time, the IRS sets criteria for classification of contractors, although some states, like California, are clamping down on classifying workers as independent contractors for any reason. There is a loss of revenue involved for government coffers because income taxes are not automatically withheld from payments made to contractors like they are from wages paid to employees.

Shawn Loring and his partner, K. Susie Adams, were attorneys at Loring & Associates before they retired. They are experienced in helping businesses navigate around employment issues.

Shawn said there is a legal presumption that workers are employees unless a company can prove they are independent contractors.

“There really isn’t a clear definition of what an independent contractor means,” he explained. “A number of factors have to be analyzed first. Then, if it looks like a duck, walks like a duck and quacks like a duck, then the worker can be called an independent contractor.”

The Level of Control

The biggest factor often revolves around how much control a company has over someone performing the work, Shawn said. The issue goes well beyond saving a few dollars on payroll taxes and benefits. Should an accident occur, legal liability rests on whether the worker was an employee or contractor.

Some food delivery businesses pushed legal boundaries when the firms started hiring people to pick up food at restaurants and deliver it to homes and businesses.

“There is a lot of unfinished law in this area right now, and the COVID situation didn’t help by opening doors for people to work remotely,” Shawn explained. “Independent contractor classifications work great until the moment everything falls apart.”

“The food-delivery companies are good examples because a worker may feel as though he is an independent contractor because he determines when he is going to work and uses his own car to make deliveries. But, the company tells drivers were to go and what to pick up for a customer,” Susie explained. “So, if the worker pulls out of a driveway and runs over a child, who is seriously injured or killed, then who is liable for that accident?”

A victim’s family will likely say it is the company, because the firm has more money to pay larger settlements. The driver, who may have loved being an independent contractor because he enjoyed some tax advantages, may now claim he was an employee because he doesn’t want to be responsible for a multi-million-dollar claim.

Plus, a company can’t say it didn’t have control over where the worker was at the time of an accident because he was involved in completing a transaction for the firm. The situation is very tricky to resolve.

It’s even more complicated with business models in place for ride-sharing companies, which require drivers to sign-in to a company-provided app, consider route guidance offered by the app, communicate with customers using the app, and complete a transaction using the app. In fact, without the app, drivers wouldn’t have access to the ride-sharing service’s customers in the first place.

“It comes down to how much control does the company have over the details of the job, and what kind of papers were signed to establish a contract,” Susie said.

Where’s the Paperwork?

“Strictly speaking, a company does not need a formal contract to classify a worker as an independent contractor,” Shawn explained. “But, you’re taking a big risk as an employer if you don’t have a signed contract.”

If a legal issue ever arose out of a work situation, one of the first questions lawyers will ask is, “Where is the paperwork?”

“We’ve been involved in cases like that. That’s when there is a big gasp and the air rushes out of the room,” Shawn said. “Then someone will say, well, we’ve got 10 emails that we exchanged back-and-forth. But, a jury may not see that as a contract. An ounce of prevention is worth a pound of cure. To make sure you’re legally protected as a business owner, you will want to pay an attorney a couple of bucks to draft a contract.”

If a worker is required to sign a non-compete agreement, that opens a whole new can of worms.

“If a worker might have access to sensitive information, the employer might want to establish a fence around what can be done with the information,” Shawn explained. “Customer lists and contact information are good examples. Can the worker provide the same type of services to other people – even competitors – or use the data to solicit business on his own?”

“If a worker is providing service to your company and 12 others in the same area, he’s probably a contractor. But, if you think, ‘Hey, you work for us,’ then the worker is probably an employee,” Susie added.

Things to Consider

For most jobs involving Workampers, here are some important elements to consider before deciding to classify a worker as an employee or an independent contractor:

• What work will be provided? The more details a company wants to exert over the type of work being performed and how it’s completed, the more a worker will probably be viewed as an employee rather than an independent contractor.
• Who will provide the work? If the employer is only concerned about the finished product and doesn’t care how the work is done and by whom, then an independent contractor arrangement may work well.
• When will the work be performed? If a worker has to be at a specific place at a specific time, he or she is probably an employee. If the job can be completed when it is convenient to the worker, perhaps he or she is a contractor. Think of the difference between staffing a front desk and doing remote accounting work.
• Where will the work be performed? If the work must be done on-site during business hours, chances are good it is done by an employee. If work can be performed wherever the worker may be, a contractor can be utilized.
• What tools will be used? If a worker provides the tools necessary to complete a job, he or she may be a contractor. For example, if a worker is hired to mow a lawn, does he show up and use equipment provided by the company, or does he bring his own mower, rake and blower with him?
• What compensation will be provided? If compensation is based on the number of hours worked, rather than a flat fee for a completed project, chances are the job is performed by an employee. While contractors may receive bonuses for exceptional work, they generally don’t get benefits like paid time off or insurance.
• Does the worker complete a time-card or send an invoice? If the worker clocks in and out every day, he will probably be viewed as an employee rather than an independent contractor.
• Does the worker live on-site? This one is tricky. If the employer wants the worker to be on-site so he or she can work whenever needed, the worker may be viewed as an employee.
• Are uniforms provided? If a worker has to wear specific clothing while providing service to the firm, he is probably an employee.

“If an accident takes place or a situation develops where a contractor claims he really was an employee, then lawyers are going to get their hands on the bills, timecards, policy manuals, letters of agreement and whatever else they can discover to help establish whether the worker was an employee or contractor,” Susie said.

“At that point, actions speak louder than words. An employer can have someone sign a beautifully-worded document claiming this particular person is an independent contractor, but if the employer told the worker exactly where to be and what to do, the company’s case quickly unravels.”

Each Situation is Different

Shawn and Susie noted that, in the eyes of the law, workers are presumed to be employees until they are proven to be contractors. However, there may be some situations where Workampers could fall into either classification.

For workers, advantages to being an employee include having taxes automatically withheld from a paycheck and access to benefits like COBRA health insurance. Being an employee removes a lot of liability for anything that may happen on the job, Shawn said. In fact, an independent contractor can generally be sued in addition to the company. That’s not often the case when employees are involved.