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Contractors vs. employeesBy Troy D. Thompson
In all cases, it is the employer's burden to prove that an individual meets the requirements under the legal test(s) applied. Neither the label used by the parties, nor the use of a written agreement is determinative. Moreover, one agency's determination is not binding on another. Therefore, an individual could be considered an independent contractor for tax purposes but an employee for worker's compensation purposes. Liability for mis-classification The consequences for mis-classifying an employee as an independent contractor can be significant. Mis-classification can result in wage and hour violations, penalties, fines, and other liability. For example, an employer could be ordered to pay worker's compensation benefits to an injured worker without the benefit of any worker's compensation insurance coverage. The employer could also be ordered to pay overtime wages going back three years, plus an equivalent amount in damages, the individual's attorney's fees, and litigation costs, not including the employer's own costs of defense. This exposure can exceed $100,000 in a garden-variety case. Accordingly, an employer should take a conservative approach when deciding which individuals to classify as independent contractors. Unless the employer is confident that it can satisfy all factors of each applicable test, it should assume that governmental agencies will conclude that an employer/employee relationship exists. An employer cannot successfully defend a challenge by showing that others in the marketplace are engaged in the same conduct, although that is a relatively common response from employers facing a challenge. Early preparation: Setting up defenses Employers can effectively reduce their liability exposure by taking some basic steps now to increase their likelihood of successfully defending against such a challenge: • Closely analyze the relationship between the parties and apply all of the applicable legal tests for independent contractor status. If you are not confident that you will be able to satisfy all factors of each test, assume that the individual is an employee and not an independent contractor. • Have your attorney prepare carefully drafted independent contractor agreements for all such relationships. • Make certain that your independent contractors own stand-alone business entities (e.g., LLCs, etc.) have separate business offices and that they hold themselves out to the public as the operators of separate businesses (e.g., yellow page ads, etc.) • Avoid individuals who are largely dependent upon your company for their livelihood, who perform work also being performed by your employees, or who work as part of a crew assembled by your company. These are red flags. • Don't classify the same individual as an employee for some jobs and as an independent contractor for others. This is another red flag. • Get written invoices from your independent contractors for all jobs. madison.com ©2009 Capital Newspapers. All rights reserved. |
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