Employee or Independant Contractor?

Posted By on March 5, 2009

When I sat down to write this I thought that I would bring the various laws together to discuss the physical distinction between an employer  and an Independent Contractor.  However when I went out on the Internet and looked to see what others had been doing it appears there are a large number of checklists, quotes and articles tearing apart and explaining this distinction. What I would like to do here today is briefly speak about the impact of the actual status upon the Independent Contractor, contractor, employee and the employer.    The question of whether someone is an Independent Contractor or an employee is becoming more and more of a controversy.  What I would like to do is develop this theme over time and approach it from a number of different directions.  While I do have a general concept in this I would like to take this opportunity to ask readers of this article to provide some suggestion as to where you would like to see this discussion go since ultimately you are the target.  It would be really great if employers/employees and independent contractors/contractors were to communicate with me, in the comments section for this post,  to provide more balance to the article.   

Just a few years ago worker’s compensation insurance premium was in most instances about 25% of what it is today.  Businesses are cutting to the bone trying to survive our current economic plight and they are looking at things like overtime, payroll taxes, workers compensation premium and a multitude of other items.  Each of these items, and many more, distinguish the costs of an employee versus an independent contractor.  These costs are part of every job and product which is built and if the builder/contractor can shift all or a majority of them to someone else then it increases their potential for profit.

Even as our economy seems to fall apart agencies more closely focus upon the accuracy of the contractors designation of an Independent Contractor.  The fallout from this close scrutiny provides more and more protection for the employee which protections are not necessarily offered to the Independent Contractor.  There was a time and it wasn’t too long ago that an employer could have a Worker sign a written Independent Contractor agreement, provide the worker with a 1099 and not provide a timetable for the times when an employee had to be at work and begin to establish a fairly decent position to argue that the employee was an Independent Contractor. You could basically take a checklist, pretty much the same one the IRS used to determine Independent Contractor status, and structure the basis for establishing the Independent Contractor relationship so the employer could be fairly comfortable in the designation.  Times have really changed and the Independent Contractor designation is becoming much more difficult to prove out and the total reliance upon a checklist is probably misplaced by both of the parties.  Audits by the Ohio Bureau of Workers Compensation, the Ohio Department of Job and Family services and others often call into question the designation by looking beyond what is said in the Agreement and what is done administratively and cut down to the actual practices between the Contractor and the Independent Contractor.  However, the benefit of establishing the Independent Contractor status is so great that a contractor is still willing to run that fine line between Independent Contractor and employee taking on the potential for fines and repayment for past unpaid benefits in the process.

This question should be in the forefront of the minds of not just the employer’s but also the workers.  A worker who has been designated as an independent contractor is not just having some intangible right taken away from them but is really having money taken right out of their pocket.  This is not just some question for debate but something that is impacting every worker who is currently classified as in Independent Contractor. This worker will have to come up with 50% (self-employment tax) of the amount paid for Social Security and Medicare out of his wages each year.  At the same time that worker, if he wants some protection, will also need to find the money to pay for his own worker’s compensation coverage and he must provide this coverage for those who he employs, unless they also are Independent Contractors.  You have undoubtedly heard about the Fair Labor Standards Act and other federal and state based, minimum wage laws and other wage regulations, rules and orders.  When the employer/contractor is dealing with an Independent Contractor he does not have to worry about paying that contractor a minimum wage, unless prevailing wage controls the job site, since he is not paying for the number of hours worked but rather the completion of a particular job.   Neither does the general contractor need to worry about overtime payment, except for his own employees, again because hours worked are not the concern.  The Independent Contractor also needs to obtain some type of liability insurance to cover his actions at the job site should he injure some third party or cause property damage and in many instances the Contractor will require proof of such insurance before he hires the Independent Contractor.  The list goes on and on showing the burden to the Independent Contractor that he would not have to bear if he were an employee.

As I have stated the employer must bear all of these costs if the person is an employee.  I really do not think it is fair to look at the Contractor and assume because they are the main hirer on the job that they can necessarily bear the financial burden themselves.  It is not unusual for a General Contractor to have only a few real employees and rely upon his ability to hire Independent Contractors to meet the work goals in any project.  And when they are bidding a job if everyone else is hiring Independent Contractor’s to fulfill the agreement they are probably going to have a competition problem when they make their bid if they are not doing likewise.  The real key being the Independent Contractor’s ability to perform the work at a charge less than all of the cost’s of hiring an employee, supporting and managing him.

There is a real purpose and need for the Independent Contractor classification and as long as it is truly a clear Independent Contractor situation a great deal of benefit can be obtained by both parties.  An Independent Contractor probably provides his services to many contractors doing a job here and a job there in order to fill their day or their week with work.  If they were truly an employee then if the employer did not have work they would be laid off or carried by the Employer at a cost.  Further the Independent Contractor is in a very good position to contain his costs and become particularly proficient in a narrow niche area and by doing so to maximize his profit.  The real problem in these type of agreements comes where the contractor who is  hiring the Independent Contractor wishes to have his cake and eat it too by imposing more control upon the Independent Contractor than is permissible to maintain the distinction.  This lack of control is one of the primary downsides to hiring an Independent Contractor.  The contractor must wait for the Independent Contractor to perform his job, within the terms of any agreement which they have between them.  It is often difficult for the contractor to specify exactly when they will need the independent contractor which makes it difficult to provide a certain date, in any oral or written agreement between them, for the Independent Contractor to perform their services.  The limitation of control over the Independent Contractor is certainly not a benefit to the Contractor because the more control he has the easier it is to keep a job move forward without interruption.

Then you have a bad economy, especially in the construction business,  and many of the Independent Contractors are fighting for the shrinking amount of construction work which is still going on.  The general contractor  needs only set back and let the  Independent Contractors fight between themselves cutting their bids to the finest of margins in order to obtain some work to fill their week.  On the upside if an Independent Contractor is particularly proficient in what he does then he may be able to charge a premium for his work which might not be available to a general employee.   Even if the Independent Contractor cannot charge a premium if they are proficient a premium is built in where they are able to do the work more quickly than another and get more jobs done each week.

Things are not all glossy for the general contractor either.  The State and Federal Government is looking closer and closer as to whether the worker  is indeed an Independent Contractor.  Not necessarily just to protect the worker but also to make the revenue stream from payroll taxes and other employment related charges be more stable.

When it is all said and done the rules imposed in maintaining the distinction between and Independent Contractor and an Employee are a protection for those individuals which as I stated above can provide benefits to both parties in the relationship and likewise impose some burden.

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7 Responses to “Employee or Independant Contractor?”

  1. I foresee a future economy with increased legitimate independent contractor relationships. If we ever manage the get the health care monkey off employers’ backs, it will be off employees’ backs as well, and they will be much more interested in continuing the consulting, multiple-income stream existence that sustained them through the current hard times — once they don’t need a big company providing the bennies.

    Tax revenue is the biggest problem. Self-employment tax is a bear, as all of us self-employed lawyers know. I think the govt. needs to come up with a process for withholding or more frequent reporting and payment or the revenue losses will escalate as more people earn as ICs.

  2. George: I agree with you. The hidden costs associated with being an Independent Contractor create a serious burden. Because of the scale at which the “big employer” buys benefit packages they will always be in a position to purchase them at a discount to what the individual can. Membership in small employer groups where they can combine their purchasing power provides some leveling of the playing field but it just cannot match the single “big employer” in purchasing power. Self-Employment tax has always been a real burden and it is easy to let it get ahead of us. Thank you for taking the time to comment on my post. I certainly appreciate it. Chuck

  3. I received an interesting E-Mail from George which addressed this post and thought I would bring a portion of it back into these comments. Please note that anyone who sends me an E-Mail can rely upon my discretion in not giving out any of their private information.

    Thank you for the E-Mail which you sent me. I brought a portion of your discussion back to the Comments section of this posting because I think your observations are very relevant to the subject of this article.

    “Maybe someday the IRS and Congress will figure out that instead of treating it as a “misclassification” problem, they should focus on solutions that make the classification unimportant or less important. There should be — from a free-market standpoint — neutrality as to form of business relationship, which would encourage people to join forces in the most productive ways.” George Owner-Editor of George’s Employment Blawg
    http://www.employmentblawg.com

    I agree with you that one way to address the problem of mis-classification might be to look at limiting the actual impact of the legal distinction between being an Independent Contractor versus an Employee. My next posting in this series may develop this thought. I would appreciate the comments from other readers concerning these thoughts with a possible question for comment stated as: “From a legal perspective would it be practical to eliminate the distinction between Independent Contractors and Employees on at least some levels in the Employment context?” Certainly every discussion is defined by the questions which are asked to start it therefore if anyone wishes to suggest a new question please do not hesitate to provide it. In fact the more questions, observations and comments which are provided which home in on this concept the better. If it concerns you that your question might not appear directly related to the particular point we are discussing please remember that I had intended, from the outset, to write a series on the subject of Independent Contractor vs. Employee and your points raised might provide the direction for a future posting.

  4. KrisBall says:

    The way I see it companies are getting into the bigger picture of the outsourcing field especially now that global online resources are available. It is such a sad note that companies would only think of in terms of what strategy gives them the better edge. I totally agree with the author that instead of focusing on the classification, the government can actually do a better job of making it a win-win situation for both sides. Otherwise, we might see a spiking unemployment rate in the years to come.

  5. Kris: From recent activity in the news it looks like the government will be looking closer at these classifications in the future. President Obama has stated that a substantial sum of money is being earmarked just to find and remedy misclassified Independent Contractors. Senator Kerry has proposed legislation that will put stronger impetus on Employers to properly classify their workers. While the driver for this closer review seems to be lost tax revenue I suppose that whatever the reason our country will be seeing a change in enforcement of the proper classification of workers. The upside to having tax revenue as a reason for tightening up classification is there is a need for the increased revenue and there should be a benefit in enforcement so this process will be a serious effort by government. Whether stronger enforcement will benefit workers still remains to be seen because of the ripple effect of any change. As you indicated “outsourcing” is becoming, or has become, a significant consideration for Employers. With this new government direction of increased enforcement and stricter review of the proper classification of workers outsourcing may become even more viable with employers where the type of employment permits it. If this policy can be implemented without being particularly over reaching then this could be a positive result. However, if enforcement eliminates the Independent Contractor classification except in absolutely clear circumstances then the impact could be very undesirable. I am in the process of reviewing this scenario for a new business right now and the current climate regarding classification is of great concern. Those employers who have classified their employees as independent contractors should all go back and review this determination again because the stakes in misclassification could be going up. I have yet to review Senator Kerry’s proposed legislation but if penalties and other costs involved with misclassification increase and defenses to misclassification become less available then employer review should happen sooner rather than later. Those employers who have made a decision to classify their workers as Independent Contractors on border line distinctions cannot simply act like business is usual. Let us hope that the question of “fairness” and greater clarity in the rules used to make the classification can be legislated into this matter and if not that enforcement will at least have some flexibility. The practical impact of stricter enforcment will be increased employer costs which will probably be passed on to the consumer to some extent, as well as, impacting income to the employee. I really hope that this new attitude will produce a “win-win” situation for all but only time will tell.

  6. Craig Saunders says:

    My question is i resentlly got hired by a trucking company in ohio as a independent contract driver he supplying the truck, paying for fuel ,e.t.c will i still be recognized as a employee and what should i look out for my # 513-828-9377

  7. Craig: The question you pose is not one subject to an easy response, even such a general one as follows, as these matters are all very fact driven. That said, the Independent Contrator (IC) classification of workers has become one that the IRS has even more scrutinized as time progresses. At one point in time the IRS checklist was a helpful aid to help suggest IC/Employee status for other entities but it, in itself, might not be the final determiner. You might keep in mind that one part, and there are other others, of the reason the employer uses the IC classification is to limit their obligation for paying premium, or other obligation, relating to Workers Compensation. This is not necessarily a bad thing as many IC’s are already paying for their own Workers Compensation Insurance and the absence of the additional expense associated with an employee, vice IC, might serve to make for a more compeititive payment for work performed. If you are injured you might have, looking only at Workers Compensation, an argument that you are an employee of that employer instead of an IC. Of course this “might” depends upon a lot of things I will not comment upon due to the general nature of this blog. Because of the wide and substantialy severe, for the employer, impact of such a determination you may well face an employer willing to expend substantial effort in opposing any claim by you to be an employee. If you are viewed as an IC in any later determination then, absent your separate application and approval for your own personal Workers Compensation coverage and payment of premium, you are left in a potentially poor postion in respect to your participation in the Workers Compensation Program. If injured you may find yourself not only limited in what you can do physically but financially. This would probably not be the best time to find out if you are covered by any employer’s workers compensation policy. It just concerns me to leave such a potentially life changing benefit as workers compensation coverage subject to a later determination. If adverse, this determination could not only impact your ability to obtain medical treatment but also to obtain even the wage support type benefits of Temporary Total or other important benefits which might be available under the Workers Compensation Fund if you had been deemed an employee or carried you own Workers Compensation Policy. I am not advising you in this matter and certainly do not represent you, and this blog was not put in place to give any type of advice or provide information that people should base their decisions upon, but rather, to make general comments/observations and sometimes raise a question in peoples minds to make them inquire more fully. If your circumstances give you concern you may wish to obtain the advice of competent legal counsel prior to the time you find yourself in need of a clearer determination.

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