I have a 1099 contractor who does not want to become an employee, but technically she’s been performing the same functions an employee would. She has been a contractor for over a year. How would you advise us to handle this situation? — Anonymous
Misclassifying workers as independent contractors can be a costly mistake, even when done with the best intentions. An employer can be assessed back taxes and huge penalties—at both the state and federal levels—for not withholding taxes or making unemployment insurance contributions. In addition, a mischaracterized independent contractor is likely not covered by workers’ compensation, which poses a risk to an employer of both a state enforcement action and liability if the worker is injured on the job.
There is also very real and substantial potential wage and hour liability because a worker who is classified as an independent contractor often is not receiving wages in accordance with the wage and hour laws. For example, the person may not be taking the legally required meal and rest breaks or earning overtime for hours worked in excess of eight hours per day or 40 hours per week.
Independent Contractor or Employee?
Typically, to determine whether to classify a particular worker as an independent contractor or an employee, employers, courts, and other government agencies look to a variety of factors. The key consideration in all cases, however, is the amount of control the company or firm has over the worker. One would examine whether the company is controlling how, when, or where the worker performs his or her work, such as if it gives specific instructions, requires approval before the worker can act, and the like. More employer control suggests employee status.
Other factors involve examining how the worker is paid. For example, a worker paid a salary or by the hour looks like an employee. On the other hand, a worker who incurs expenses that the company does not reimburse, assumes financial risk, has his or her own business, and provides services to other companies looks a lot more like an independent contractor. Courts and agencies also review whether the company and the worker can part ways at any time (similar to an employee) or are bound to a contract’s terms (which argue for independent contractor status).
Reclassify the Worker or Restructure the Relationship
It appears from the way you phrased your question that you have already done some analysis of the company’s relationship with the worker, and you have determined that the balance of factors likely weighs in favor of employee status. But for whatever reason, this worker would prefer to be classified as an independent contractor. Unfortunately, the worker’s preference would be of little help to your defense in the liability scenarios outlined above. To protect yourself, your best bet is to reclassify the worker correctly as an employee.
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Your other option is to make some changes so that the worker truly functions as an independent contractor. Rather than give her duties similar to those performed by employees, you could make arrangements to have her perform only special projects and determine herself how, when, and where to get the projects done.
To that end, you could enter into a written agreement with her that makes clear, among other things, that the worker maintains her own business and bears her own expenses; that she is free to provide services to others; that she is being engaged by you for a particular project or projects; that the engagement will end when a particular project is complete or by a certain date; that she is to invoice you for services provided; that she will obtain her own insurance, equipment, and supplies to perform the services; and that she will comply with all tax laws and obtain all required business permits. Of course, such an agreement means nothing if you and the worker do not act in accordance with its terms, so you would want to make sure that the arrangements are set up properly.
It’s simply not worth the risk to continue with an independent contractor arrangement that even you believe is incorrect. You will save yourself a lot of potential future liability by reworking the arrangement now.
Sandra Rappaport, Esq., is a partner at the San Francisco office of the law firm Hanson Bridgett LLP.