In yesterday’s Advisor, attorney Christine V. Walters offered tips on legal dangers associated with volunteers, interns, and independent contractors. Today, more of her tips, plus an introduction to the 50×50, a unique guide to 50 employment laws in 50 states.<
Walters, who is a consultant with the FiveL Company in Westminster, MD, gave her recommendations at SHRM’s Employment Law and Legislative Conference, held recently in Washington, DC.
The IRS Rules
The IRS has a somewhat different approach to making the distinction between an employee and an independent contractor (go here for the EEOC’s guidelines), says Walters. It looks at behavioral control, financial control, and the relationship of the parties.
Behavioral Control
The issue here is whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done—as long as the employer has the right to direct and control the work. For example:
- Instructions—if you receive extensive instructions on how work is to be done, this suggests that you are an employee. Instructions can cover a wide range of topics, for example:
- how, when, or where to do the work
- what tools or equipment to use
- what assistants to hire to help with the work
- where to purchase supplies and services
If you receive less extensive instructions about what should be done, but not how it should be done, you may be an independent contractor. For instance, instructions about time and place may be less important than directions on how the work is performed.
- Training—if the business provides you with training about required procedures and methods, this indicates that the business wants the work done in a certain way, and this suggests that you may be an employee.
Financial Control
These facts show whether there is a right to direct or control the business part of the work. For example:
- Significant Investment—if you have a significant investment in your work, you may be an independent contractor. While there is no precise dollar test, the investment must have substance. However, a significant investment is not necessary to be an independent contractor.
- Expenses—if you are not reimbursed for some or all business expenses, then you may be an independent contractor, especially if your unreimbursed business expenses are high.
- Opportunity for Profit or Loss—if you can realize a profit or incur a loss, this suggests that you are in business for yourself and that you may be an independent contractor.
Relationship of the Parties
These are facts that illustrate how the business and the worker perceive their relationship. For example:
- Employee Benefits—if you receive benefits, such as insurance, pension, or paid leave, this is an indication that you may be an employee. If you do not receive benefits, however, you could be either an employee or an independent contractor.
- Written Contracts—a written contract may show what both you and the business intend. This may be very significant if it is difficult, if not impossible, to determine status based on other facts.
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The SCOTUS Approach
The Supreme Court has said that there is no definition that solves all problems relating to the employer-employee relationship under the Fair Labor Standards Act (FLSA). The Court has also said that determination of the relation cannot be based on isolated factors or upon a single characteristic, but depends upon the circumstances of the whole activity.
The goal of the analysis is to determine the underlying economic reality of the situation and whether the individual is economically dependent on the supposed employer. In general, an employee, as distinguished from an independent contractor who is engaged in a business of his own, is one who "follows the usual path of an employee" and is dependent on the business that he serves. The factors that the Supreme Court has considered significant, although no single one is regarded as controlling are:
- The extent to which the worker’s services are an integral part of the employer’s business (examples: Does the worker play an integral role in the business by performing the primary type of work that the employer performs for his customers or clients? Does the worker perform a discrete job that is one part of the business’ overall process of production? Does the worker supervise any of the company’s employees?)
- The permanency of the relationship (example: How long has the worker worked for the same company?)
- The amount of the worker’s investment in facilities and equipment (examples: Is the worker reimbursed for any purchases or materials, supplies, etc.? Does the worker use his or her own tools or equipment?)
- The nature and degree of control by the principal (examples: Who decides on what hours to be worked? Who is responsible for quality control? Does the worker work for any other company(s)? Who sets the pay rate?)
- The worker’s opportunities for profit and loss (examples: Did the worker make any investments such as insurance or bonding? Can the worker earn a profit by performing the job more efficiently or exercising managerial skill or suffer a loss of capital investment?)
- The level of skill required in performing the job and the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise (examples: Does the worker perform routine tasks requiring little training? Does the worker advertise independently via yellow pages, business cards, etc.? Does the worker have a separate business site?).
Check State Laws as Well as Federal
Don’t forget to check state codes and regulations, says Walters, as nearly half the states have passed legislation related to independent contractors.
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