Employment Law

Employee or Independent Contractor? Right to Control Is Key

A continuing point of contention in employment law revolves around who is an employee versus who is an independent contractor. The issue seems to come up often in wage and hour cases and workers’ compensation or unemployment claims.independent contractor

The South Carolina Court of Appeals recently addressed the employee/independent contractor question in a workers’ comp case. Read on to see how the court analyzed the issue.

Factual Background

On November 8, 2013, “Chris” sustained injuries while he was performing heating, ventilation, and air conditioning (HVAC) work at a single-family home being constructed in the Market Commons subdivision in Myrtle Beach. He fell from a 30-foot extension ladder while he was “trimming out” a house and sustained injuries to his legs, back, and neck. He was subsequently hospitalized.

On November 9, Chris notified Riverport Insurance Company of his accident. On November 20, Riverport’s third-party claims administrator denied the claim because Chris had “knowingly and voluntarily” excluded himself from its workers’ comp insurance policy. That same day, Chris filed a Form 50 naming Tech Service of Myrtle Beach, LLC (TSMB), as a party to his case and requesting a hearing.

On December 13, Chris filed an amended Form 50 naming Tech Service as a party. Tech Service has six to eight employees, which it shares with TSMB. Before an employee is sent to a particular jobsite, the employee is informed whether the job is for Tech Service or TSMB so he can record the time accordingly.

At a March 25, 2014, hearing before a single workers’ comp commissioner, Chris testified that he was a longtime employee of both Tech Service and TSMB and that he was in the course and scope of this employment at the time of his accident. He explained that his first cousin, “Carlos,” is the owner of Tech Service and a co-owner of TSMB.

Chris claimed that in early 2013, he complained to Carlos about not receiving overtime pay or having proper deductions taken from his paycheck. According to Chris, Carlos occasionally avoided paying him overtime by spreading the hours he worked between Tech Service and TSMB. He testified that Carlos offered to make him a “1099 employee” (a 1099 is used to report payments made in the course of a trade or business to someone who is not an employee or to an unincorporated business) and help him with his taxes when he filed them.

Chris stated that Carlos gave him $1,250 in cash and instructed him to purchase his own workers’ comp insurance policy for “tax purposes only.” On February 21, he purchased the Riverport policy but excluded himself from it because he believed he was covered by Tech Service’s policy.

In March, Carlos began paying Chris without deducting income taxes and started reporting his wages using a Form 1099 rather than a Form W-2. Although Chris performed “side work” to make extra money both before and after the March 2013 changes, he denied signing an independent contractor agreement or otherwise changing his employment relationship with Tech Service. Beginning March 4, however, he submitted weekly “Chris’s Heating and Cooling” invoices to Tech Service for payment according to Carlos’ instructions.

By contrast, Carlos testified that Chris first approached him in January 2013 about his desire to work for himself as a subcontractor because he wanted to make more money. Carlos denied that Chris ever complained about not receiving overtime pay or deductions from his paycheck. However, he had no documentation reflecting the purpose and the nature of his deductions from Chris’ pay.

Carlos told Chris that he could begin working as a subcontractor after he obtained a workers’ comp insurance policy and adamantly denied giving his cousin cash to purchase the policy. Carlos explained that if he was going to give Chris such funds, he would have given him a check to document the expenditure for his own business records.

Carlos learned about Chris’ accident from Tech Service supervisor “Paul.” Both Paul and Carlos told Chris that he couldn’t file a claim under Tech Service’s policy because recently audited documents reflected that he was a subcontractor.

Based on all of that information, the workers’ comp commissioner issued an order on August 29, 2014, determining that Chris was an employee of Tech Service at the time of his injury pursuant to Section 42-1-130 of the South Carolina Code (2015). The commissioner dismissed TSMB from the claim. On July 17, 2015, the Workers’ Compensation Commission (WCC) affirmed and adopted the commissioner’s order in its entirety. Tech Services appealed the commission’s decision.

Court’s Analysis

The South Carolina Court of Appeals set the stage for its analysis by noting that it was presented with the question of whether Chris was, at the time of his injury, an employee of Tech Service rather than an independent contractor.

The court observed that an independent contractor is someone who independently contracts to do a piece of work according to his own methods, without being subject to the control of an employer except with respect to the result of his work. The court further observed that no benefits are authorized under the Workers’ Compensation Act unless the employer-employee or master-servant relationship existed at the time of the alleged injury for which a claim was made.

The court also noted that the burden of proving the employment relationship is on the claimant—here, Chris—and the relationship must be established by the greater weight of the evidence. According to the court, South Carolina’s policy is to resolve doubts in favor of coverage under the Workers’ Compensation Act.

The primary consideration in determining whether an employment relationship exists is whether the alleged employer has the right to control the employee in the performance of the work. Four equally important factors are integral to determining the right of control:

  1. Direct evidence of the right or exercise of control;
  2. Furnishing of equipment;
  3. Method of payment; and
  4. Right to fire.

Courts will look at things like whether the worker entered into a contract to alter his status from employee to independent contractor, carried his own workers’ comp insurance policy, and assumed responsibility for all costs associated with the work he was doing. The court of appeals examined the extent to which Chris satisfied each of the four factors.

Direct evidence of the right or exercise of control. Tech Service argued that it didn’t control the details of Chris’ work at the time of his injury. The court observed that regardless of whether the company exercised actual control over the details of his work, there was evidence that it had the right to exercise control. The court noted the WCC had found that:

  1. The company instructed Chris on the work he was to perform, and his work was supervised.
  2. Chris reported to work as he was instructed by Tech Service.
  3. He didn’t bid for work on any projects he performed for Tech Service, including the project on which he was working when he was injured.
  4. Tech Service didn’t inform the general contractor of the project on which Chris was injured that he was working as a subcontractor or an independent contractor.
  5. Tech Service directed Chris to wear a Tech Service uniform, which he wore each workday, including the day of his injury.
  6. Chris carried Tech Service business cards and service contracts, which he executed with customers as an agent of Tech Service.
  7. Chris had the authority to order, purchase, and pick up supplies at Gateway Supply using Tech Service’s account.

The court noted that Chris worked alongside other Tech Service employees under Paul, who inspected and monitored the quality of his work product. Either Carlos or Paul would follow up with the customer to ensure its satisfaction with the quality of his work. If an issue arose on a project, Paul sent either Chris or an hourly employee to fix it.

In addition to HVAC work, Chris performed service calls and sold service contracts to customers, signing them as an employee and agent of Tech Service. He carried Tech Service invoices to jobs and executed between 20 and 100 invoices for the company after March 2013. Although there were some gaps in Chris’ work for Tech Service from March through November 2013, Carlos’ right to control the time, place, and amount of his work weighed heavily in favor of an employment relationship.

Furnishing of equipment. Tech Service contended that Chris furnished his own equipment at the time of his injury, but the court noted that the evidence indicated:

  1. Chris wasn’t financially capable of purchasing all the tools necessary to perform the jobs he worked on.
  2. Most of the tools were purchased by Tech Service and provided to Chris, including the ladder from which he fell on the date of his accident.
  3. Chris was able to charge any supplies he needed on a Tech Service account.
  4. He didn’t pay for any supplies out of pocket and didn’t have his own supply account.

Moreover, before March 2013, Chris drove a Tech Service van. He wasn’t responsible for the gasoline, maintenance, insurance, or registration of the van. In March 2013, he “purchased” a used Tech Service van from Carlos; however, there was some dispute over whether he ever paid any money for it.

“Chuck,” another cousin of Chris, testified that he loaned Chris $500 to buy the van. Alternatively, Chris explained that Tech Service deducted $500 from his paychecks. Carlos was unable to recall whether Chris paid with cash or a check, and he didn’t have a record of the sale. Nevertheless, Tech Service was no longer responsible for the gas, maintenance, insurance, or registration on the van.

Chris testified that Tech Service supplied his ladder several years earlier and he moved it from his company van to his personal van in March 2013. Although he maintained that Tech Service supplied him with other tools as well, Carlos claimed that Chris accumulated the tools over the years and transferred them from his company van to his personal van when he began working as an independent contractor. Carlos said that after Chris switched vans, he “didn’t check behind him that strongly because he was family and [Carlos] was trying to help him.”

Carlos admitted that Chris always wore a Tech Service uniform, including on the day of his accident. Additionally, Chris carried Tech Service business cards. Although he also had “Chris’s Heating and Cooling” business cards, he claimed he primarily gave them to other Tech Service employees as an ongoing joke.

However, the court was unmoved by the fact that Chris handwrote “Tech Service” on his tools, including the ladder from which he fell. In the end, it found that Tech Service’s furnishing of equipment for Chris to use on the job favored a finding of employment.

Method of payment. For this factor, a court generally looks at whether the claimant was paid by the job or by the hour and how he filed his taxes. The court of appeals noted that payment on an hourly basis is a strong indication of an employment relationship, while payment on a completed-project basis is generally indicative of independent contractor status.

The WCC had found that Tech Service determined both the amount and the way Chris was paid. Specifically, the commission found his income from Tech Service after March 2013 was largely consistent with his income from past years. The most significant change was that the company planned to report his earnings using a Form 1099.

Tech Service paid Chris on a weekly basis both before and after March 2013. Prior to that date, he was paid $14 an hour, and his wages were reported on a W-2. However, there was a dispute over how his wages were calculated. Chris testified that his hours were based on a preset amount for completion of a specified job based on the flat-rate pricing book, in which hours worked bear a relationship to the type of job performed.

He claimed Carlos told him, “I can do this by making you a 1099 employee, but if you do it faster [than the predetermined amount of time], it’s actually like you are making [20] bucks an hour instead of [14] bucks an hour.” Carlos maintained that Chris’ hours were based on the actual time he worked, and he never paid his employees using the flat-rate pricing book. Likewise, Paul testified that Tech Service employees were paid on an hourly basis.

After March 2013, Chris was paid on “Chris’s Heating and Cooling” invoices he submitted to Carlos, and his wages were reported on a 1099. Carlos told Chris the invoices were necessary for tax purposes and they needed to “look like an invoice.”

Chris explained the invoices were for amounts set by Carlos based on how much time he determined it should take to complete a job. He testified that several weeks before his accident, Carlos told him, “We’re probably going to have to go back to paying you by the hour like we were originally paying you.”

There was no employment contract between Chris and Tech Service. However, it was clear that Chris received the majority of his income from Tech Service both before and after March 2013. The only other entities from which he received minimal compensation were TSMB and his cousin Chuck’s plumbing company.

The court found that although it wasn’t as strong as the other factors, the method of payment evidence weighed in favor of affirming the WCC’s finding of an employment relationship between Chris and Tech Service.

Right to fire. Tech Service argued that it didn’t have the right to terminate Chris without liability at the time of his injury. In analyzing this factor, the court found the evidence that Carlos and Paul supervised, inspected, and monitored the quality of Chris’ work product supported the finding that Tech Service had the right to terminate its working relationship with him without liability.

In conjunction with the direct evidence of Tech Service’s right to exercise control over Chris’ work, the “right to fire” factor further favored a finding of an employment relationship. Accordingly, the court affirmed the WCC’s conclusion that the greater weight of the evidence supported the finding that Chris and Tech Service had an employment relationship at the time of his accident.

Lessons for Employers

Many employment statutes include language suggesting that coverage should weigh in favor of the employee (or in favor of an employment relationship) so employees can benefit from statutory protection. But different statutes use different standards to assess whether an employment relationship exists.

While one argument may work under one statute, the same argument may be insufficient to meet the criteria of another statute. That can be confusing, but until a single standard for determining employment status is established, employers must assess each case under the relevant statute on an individualized basis.

Likewise, don’t fall into the trap of latching onto the method of payment as the determining factor in the independent-contractor-versus-employee analysis. A court will look at all the factors rather than singling out one factor as more important than the others. Make sure you have ample evidence to support your argument.

Richard J. Morgan, an editor of South Carolina Employment Law Letter, may be reached at rmorgan@mcnair.net.