Human Resources News & Insights

Employee or independent contractor? 3 ways to tell

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When an independent contractor was fired, he retaliated … by suing the company where he worked for misclassifying him. He wanted back pay for the 26 hours of overtime he worked each week for 12 years. Did he win?

Yes. But what lead to the company’s costly downfall?

It got caught in the trap many employers have found themselves in … one in which contractors and businesses have a strong working relationship until something goes wrong — like when the relationship ends.

The man, a maintenance worker for a property management company, worked his job for 12 years — without a complaint about his contractor status. And when he sued, the only leg the company had to stand on was that he’d been working there for more than a decade and never once made a peep about his classification.

Lesson: Never assume classification decisions are OK simply because nobody’s objected to them — even if the classification has stood for years.

It’s important to revisit job descriptions frequently and compare them to what employees are actually doing day in and day out. The reason being that job duties evolve over time, and employees who were once classified properly may need to be reclassified.

What companies should do

The Internal Revenue Service (IRS) says there are three factors companies should evaluate to determine whether someone is an independent contractor or an employee:

  1. Behavioral control. If the business has the right to control or direct not only what work needs to be done, but how it gets done, then the worker is most likely an employee.
  2. Financial control. If the person has a significant investment in the work being performed, he or she may likely be an independent contractor. Also, if the person can earn a profit or incur a loss, that’s an indication the person’s in business for him or herself and is an independent contractor.
  3. Type of relationship. The IRS will also look at how the worker and the business owner perceive the relationship. If the person receives benefits — like insurance, a pension or paid leave — that’s usually a giveaway that the person’s an employee.

Determining factors

Here are the factors the court said gave away the fact that the maintenance worker was an employee:

  • The man was engaged in the core work of the business, as opposed to doing something that required special skills.
  • He was treated like an employee. He worked on the premises, and the company set his schedule, monitored his work and disciplined him when his work fell below expectations.
  • He had no significant investment in the work being done. He also had no opportunities to incur a profit or a loss (he was paid a regular salary).

Ways to ensure contractor status isn’t jeopardized

There are a number of reasons companies like to hire independent contractors — saving on taxes, overtime, benefits, etc.

And if that’s the route you want to go down, here’s a list of things you should do to make sure workers keep their contractor status:

  • Refrain from trying to dictate the day-to-day duties of contractors and how they get their work done.
  • Structure relationships so contractors have the ability to incur a profit or a loss, rather than just paying them an hourly rate or salary.
  • Keep them separate from your company. In other words, don’t give them business cards, invite them to your employee-only holiday party or issue them W-2s.

Cite: Bulaj v. Wilmette Real Estate

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