Independent Contractors v. Employees-- How to Avoid Misclassification

Copyright 2011 (c) Deirdre Kamber Todd 1

Business Real Estate Land Use Commercial Litigation Bankruptcy

Estate Planning & Taxation Healthcare Employment Family Law

Independent Contractor versus Employee Status

DEIRDRE KAMBER TODD, ESQUIRE, [email protected]

610.797.9000 ext. 383

04/08/2023

mailto:[email protected]

DEIRDRE KAMBER TODD, ESQ., CHP

Areas of Practice: Employment Labor Information Privacy/Information Access School Law Unemployment Compensation, and Healthcare

Attorney, admitted in Pennsylvania, New York and U.S. Supreme Court

Labor and management representation From outsourcing HR work, to trainer, to

litigation

Work Website: http://www.flblaw.com/attorney_directory/deirdre_kamber.asp

LinkedIn: http://www.linkedin.com/in/deirdrejkamber

Copyright 2011 (c) Deirdre Kamber Todd 204/08/2023

http://www.flblaw.com/attorney_directory/deirdre_kamber.asp




http://www.linkedin.com/in/deirdrejkamber

http://www.linkedin.com/in/deirdrejkamber


INDEPENDENT CONTRACTOR VS. AGENT VS. EMPLOYEE

No one ever claims to be an employee when they are actually an independent contractor.

Why?

That’s why we’re here.

04/08/2023


THE BASICS

04/08/2023


WHAT IS THE DIFFERENCE?

Generally speaking, an employee is one who is hired to work under the direction and control of the employer

An employee does not represent the employer

An agent works under the direction and control of the hiring party (which for an agent is titled the principal).

The key distinction between an employee and an agent is that the agent is hired with the power to represent the hiring party, the principal

04/08/2023



Generally speaking, an employee is one who is hired to work under the direction and control of the employer

An employee does not represent the employer

An agent works under the direction and control of the hiring party (which for an agent is titled the principal).

The key distinction between an employee and an agent is that the agent is hired with the power to represent the hiring party, the principal

04/08/2023



An independent contractor is hired by an employer to perform a specific task.

The key distinction between an independent contractor and either an employee or an agent is that the independent contractor performs the task according to the contractor’s own methods – the contractor is not controlled with respect to the job performance

04/08/2023


THE LAW

04/08/2023


EMPLOYEE STATUS

Classification of a hired party as an employee or agent (versus an independent contractor) will vary based on the law(s) involved and the relevant criteria

04/08/2023


IRS

GENERALLY:

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

04/08/2023

http://www.irs.gov/businesses/small/article/0,,id=179111,00.html




IRS: 20 FACTORTEST

Level of instruction. If the company directs when, where, and how work is done, this control indicates a possible employment relationship.

Amount of training. Requesting workers to undergo

company-provided training suggests an employment relationship since the company is directing the methods by which work is accomplished.

Degree of business integration. Workers whose services are integrated into business operations or significantly affect business success are likely to be considered employees.

Extent of personal services. Companies that insist on a particular person performing the work assert a degree of control that suggests an employment relationship. In contrast, independent contractors typically are free to assign work to anyone.

04/08/2023


IRS: 20 FACTORTEST

Control of assistants. If a company hires, supervises, and pays a worker's assistants, this control indicates a possible employment relationship. If the worker retains control over hiring, supervising, and paying helpers, this arrangement suggests an independent contractor relationship.

Continuity of relationship. A continuous relationship between a company and a worker indicates a possible employment relationship. However, an independent contractor arrangement can involve an ongoing relationship for multiple, sequential projects.

Flexibility of schedule. People whose hours or days of work are dictated by a company are apt to qualify as its employees.

Need for on-site services. Requiring someone to work on company premises—particularly if the work can be performed elsewhere—indicates a possible employment relationship. 04/08/2023


IRS: 20 FACTORTEST

Sequence of work. If a company requires work to be performed in specific order or sequence, this control suggests an employment relationship.

Requirements for reports. If a worker regularly must provide written or oral reports on the status of a project, this arrangement indicates a possible employment relationship.

Method of payment. Hourly, weekly, or monthly pay schedules are characteristic of employment relationships, unless the payments simply are a convenient way of distributing a lump-sum fee. Payment on commission or project completion is more characteristic of independent contractor relationships.

Payment of business or travel expenses. Independent contractors typically bear the cost of travel or business expenses, and most contractors set their fees high enough to cover these costs. Direct reimbursement of travel and other business costs by a company suggests an employment relationship.

04/08/2023


IRS: 20 FACTORTEST

Provision of tools and materials. Workers who perform most of their work using company-provided equipment, tools, and materials are more likely to be considered employees. Work largely done using independently obtained supplies or tools supports an independent contractor finding.

Investment in facilities. Independent contractors typically invest in and maintain their own work facilities. In contrast, most employees rely on their employer to provide work facilities.

Realization of profit or loss. Workers who receive predetermined earnings and have little chance to realize significant profit or loss through their work generally are employees.

Work for multiple companies. People who simultaneously provide services for several unrelated companies are likely to qualify as independent contractors.

04/08/2023


IRS: 20 FACTORTEST

Provision of tools and materials. Workers who perform most of their work using company-provided equipment, tools, and materials are more likely to be considered employees. Work largely done using independently obtained supplies or tools supports an independent contractor finding.

Investment in facilities. Independent contractors typically invest in and maintain their own work facilities. In contrast, most employees rely on their employer to provide work facilities.

Realization of profit or loss. Workers who receive predetermined earnings and have little chance to realize significant profit or loss through their work generally are employees.

Work for multiple companies. People who simultaneously provide services for several unrelated companies are likely to qualify as independent contractors.

04/08/2023


IRS: 20 FACTORTEST

Availability to public. If a worker regularly makes services available to the general public, this supports an independent contractor determination.

Control over discharge. A company's unilateral right to discharge a worker suggests an employment relationship. In contrast, a company's ability to terminate independent contractor relationships generally depends on contract terms.

Right of termination. Most employees unilaterally can terminate their work for a company without liability. Independent contractors cannot terminate services without liability, except as allowed under their contracts.

04/08/2023


IRS

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.


04/08/2023




US DOL

According to the DOL:

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.

04/08/2023


US DOL

The factors that the Supreme Court has considered significant, although no single one is regarded as controlling are:

1. 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?);

2. The permanency of the relationship (example: How long has the worker worked for the same company?);

3. 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?);

04/08/2023


US DOL

4. 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?);

5. 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?); and

6. 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?).

04/08/2023


PA L&I (UC LAW)

Services performed by a worker will be exempt under the benefit and taxing provisions of the UC Law if the individual is, in fact, an "independent contractor." In order to be excluded from coverage, the person who performs the services must meet two conditions pursuant to Section 4(l)(2)(B):

The individual must be free from control or direction over the performance of the services involved, and

The individual is customarily engaged in an independently established trade, occupation, profession or business.

Only if both of these conditions are met to the satisfaction of the Department will the relationship be regarded as an "independent contractor." Unless and until those criteria are met, the services will be "employment" subject to the coverage of the UC Law.

04/08/2023


PA L&I

The following items are not conclusive in determining "independent contractor" status:

Employer designation, either verbally or in writing, that an individual is an "independent contractor";

Statement by an individual that they are an "independent contractor";

Issuance of a Federal Form 1099.

A written agreement does not prohibit an examination of the facts to determine whether the performance of the services is subject to control or direction of the employer. If the examination shows either the exercise of or the right to exercise such control or direction, then the worker would be considered an employee and not an independent contractor.

It is immaterial if the services are performed on a full-time, part-time or casual basis.

04/08/2023


PA L&I

Issues surrounding "independent contractor" status normally arise out of random employer audits or unemployment claims filed by individuals who assert they were employees rather than "independent contractors."

The Office of UC Tax Services randomly selects employers for audit to verify compliance with the UC Law.

If issues arise concerning employee status such as those listed, an employer should have sufficient documentation to support the reasons for classifying an individual as an "independent contractor."

The Department will use all available information to determine a worker’s status.

04/08/2023


PA L&I

The presumption of the UC Law confers automatic employee status unless and until it is proven otherwise to the satisfaction of the Department.

Examples of relevant documentation would include copies of the individual’s preprinted invoices, business forms and stationery, Federal and State tax ID numbers, business telephone directory listings, public advertisements soliciting business, Articles of Incorporation and leases on business properties.

04/08/2023


COMMON LAW EMPLOYEE STATUS

Following are the factors affecting employee versus independent contractor status, found in Section 220 of the Restatement (Second) of Agency:

(a) the extent of control which, by the agreement, the master may exercise over the details of the work

(b) whether or not the one employed is engaged in a distinct occupation or business

04/08/2023



(f) the length of time for which the person is employed

(g) the method of payment, whether by the time or by the job

(h) whether or not the work is a part of the regular business of the employer

04/08/2023



(i) whether or not the parties believe they are creating the relation of master and servant, and

(j) whether the principal is or is not in business

04/08/2023

04/08/2023 Copyright 2011 (c) Deirdre Kamber Todd 28


ISSUES

04/08/2023


RESPONDEAT SUPERIOR

ARE YOU RESPONSIBLE FOR THE ACTIONS OF THE IC/EMPLOYEE?

Respondeat superior is a legal doctrine providing for potential vicarious liability for an employer based on an employee’s (or agent’s) wrongs, for example, for an employee’s negligence or intentional torts

An employer usually is not responsible for torts committed by independent contractors

Under respondeat superior, an employer is only liable for employees or agents torts committed within the scope of the job

04/08/2023


RESPONDEAT SUPERIOR

The test used in many states for whether an employee’s actions are within the scope of the employment requires assessing whether the individual is carrying out the object and purpose of the enterprise, as opposed to acting exclusively in his own interest

04/08/2023


NEGLIGENT HIRING

Beyond respondeat superior, an employer may be liable for an employee’s torts based on the employer’s own negligence in the hiring, retaining, or supervising of the employee

The plaintiff must prove the following elements in a negligence case Breach of a duty of due care Injury Causation

04/08/2023


NEGLIGENT HIRING: DUTY OF CARE

A breach of due care involves failing to use the same care a reasonable person would have used under similar circumstances

The law does not require perfection, just reasonable care

In proving causation, the plaintiff must establish two causation components: Causation in fact – did the injury occur

because of the defendant’s actions (failure to use due care)?

Proximate causation – was the injury foreseeable (was the injury likely enough to happen that a reasonably prudent defendant would have behaved differently)?

04/08/2023


NEGLIGENT HIRING: DUTY OF CARE

A lack of reasonable care in hiring by an employer may be found in the following examples:

Failure to read a job applicant’s resume or job application

Ignoring conflicting or overlapping dates on the resume or application

Failure to inquire about gaps in dates on the resume or application

Ignoring “red flags” such as previous firings;

Failing to perform a background check on an applicant (AHH, does this include the internet?)

04/08/2023


POTENTIAL LIABILITY

04/08/2023


OTHER ISSUES

NON-COMPETITION

ADVERTISING ON FACEBOOK (MORSE v. MER)

CONTRACTS

OPENING DOOR TO LARGER ISSUES

BACK TAXES, WAGES, UC, WC, ETC.

04/08/2023

04/08/2023 Copyright 2011 (c) Deirdre Kamber Todd 37

pay unemployment insurance, worker's compensation insurance or payroll taxes for them. But the rules governing which workers are genuinely "independent" are strict -- and often flouted.

The Internal Revenue Service launched a program last month that will randomly examine 6,000 companies over the next three years for employee misclassifications. The federal government estimates it will raise $7 billion over the next 10 through tighter enforcement.

If your business uses independent contractors, get ready for new scrutiny. Hoping to boost tax revenue, the IRS and many state governments are cracking down on how companies classify their workers. When employers report wages for independent contractors on IRS form 1099, rather than a W-2, they aren't required to

http://money.cnn.com/2010/03/29/pf/taxes/employee_audit_crackdown.smb/index.htm



http://money.cnn.com/


Questions?

Comments?

Deirdre Kamber Todd, Esq., [email protected]

Fitzpatrick Lentz & Bubba, P.C.

04/08/2023

mailto:[email protected]

Documents

Independent Contractors v. Employees-- How to Avoid Misclassification