Keeping Independent Contractor Relationships ‘Independent’

Whether a company is a start-up, in growth mode, or looking to hire out-of-state workers, it may face a dilemma about whether to bring on a new worker as an employee or an independent contractor. That distinction is important because independent contractors don’t receive overtime pay or unemployment benefits, aren’t covered by the company’s workers’ compensation insurance, and are fully responsible for paying taxes. They generally aren’t protected by antidiscrimination and other laws either. In most cases, the appropriate choice is to hire the worker as a W-2 employee. But for many reasons—maybe because the worker wants more flexibility or the company only needs short-term help—each might think entering an independent contractor relationship is best. But not so fast.

Independent Contractors in New Hampshire

Under New Hampshire law, workers are considered employees unless (with limited exceptions) they can satisfy the criteria listed in NH RSA 281-A:2 VI(b). That is, to be considered independent contractors, workers must:

•     Possess a federal employer identification number (FEIN) or Social Security number or must agree to carry out the responsibilities of an employer.
•     Have control and discretion over the means and manner of performance of the work, meaning the result of the work, rather than how and when or where it’s done, is key.
•     Have control over the time when the work is performed, although the parties can agree on deadlines for completion, the range of work hours, and the maximum number of work hours.
•     Pay and supervise their own assistants.
•     Hold themselves to be in business for themselves or be registered with the state as a business and have continuing business obligations.
•     Be contractually responsible for satisfactory completion of the work.
•     Be allowed to work for others and not exclusively for the company.

The New Hampshire Department of Labor (NHDOL) will investigate situations in which there’s a concern a worker has been misclassified as an independent contractor. With advance planning and documentation, companies and contractors may increase the likelihood that the NHDOL will agree with the independent contractor designation.

Some of the administrative details are easier to deal with, such as obtaining an FEIN. But unless the parties are thoughtful about the way they structure their agreement and their relationship, it’s easy for lines to blur. Common mistakes include not paying attention to the degree to which the worker is integrated into the business and not restricting the amount of control the company exercises over the worker. In other words, the facts could show that the worker isn’t really “independent.”

Ways to Maintain Independent Status

Below are some considerations that could help reinforce workers’ independent contractor designation:

•    If they set up a separate entity and follow all corporate formalities, such as establishing a business bank account and paying business insurance and taxes;
•    If they’re responsible for acquiring and paying for all necessary licenses, credentialing, certificates, and training;
•    If they make serious and sustained efforts to build their own brand, such as by advertising and marketing the business through a professional website, having a social media presence, and creating other business development materials;
•    If the company and the workers enter a clear independent contractor agreement that confirms the nature of their relationship and their acknowledgment of each of the independent contractor factors, defines the services to be provided, ties compensation to projects and deliverables rather than to weekly hours worked, and ensures the parties have considered and will comply with the laws in the state where the workers will perform services;
•   If they diligently stay separate from the company’s business, minimizing involvement in its daily operations, meetings, and communications;
•   If the company limits oversight of the workers (keeping the focus of the relationship on the end result and interim deliverables rather than daily accomplishments or hours) and limits their supervision over company employees;
•   If they actually exercise discretion to decline particular assignments;
• If they control or direct the scope of work, deadlines, pay rates, deliverables, the methodologies and tools used to perform the work, and the location of the work;
• If they don’t work for just one client on a full-time basis for a long period but are instead actively offering and/or providing services to others;
•  If the parties use an invoice system focused on project timelines and deliverables rather than a pattern that resembles a workweek; and
•  If the parties avoid using words that may conflict with a contractor relationship, such as “staff” or “contracted employee.”

Takeaway

If the NHDOL or a court decides a worker should have been an employee, the worker could be entitled to unpaid wages, overtime, benefits, and other damages. To minimize liability, look critically at the reality of the relationship up front. Be prepared to follow the formalities that show independence. If you and the worker are confident you satisfy the independent contractor tests and choose that path, be aware that becoming complacent and allowing lines to blur over time can have costly consequences.

Karen Whitley is an attorney with Sheehan Phinney Bass & Green PA in Manchester, New Hampshire, and can be reached at kwhitley@sheehan.com.