Whether a person is an independent contractor or an employee has important legal implications. The distinction affects the rights of the independent contractor/employer, income taxes, and the liabilities of both employer and worker.
Considerations
In determining the worker’s classification, courts look at the facts surrounding an employment relationship and ask the following questions:[1]
- Does the company control what the worker does and how they do it?
- How is the worker paid?
- Are expenses reimbursed?
- Who provides the tools/supplies?
- Are there written contracts?
- Are there employee benefits?
- Is the work performed an integral part of the business?
- Does the worker perform tasks for one company or several?
- Does the worker maintain separate business accounts?
- Is the relationship between worker/employer permanent?
- How much initiative, judgment, and foresight does the worker have in accomplishing the assigned task?
Classifications
Many factors influence the classification of worker. In general, an independent contractor (“IC”) operates with more autonomy than an employee, particularly regarding how tasks are accomplished for the person that pays them.[2] ICs are often paid at a fixed price, not reimbursed for their expense, and use their own tools. Contracts often exist between the IC and employer, but these contracts usually detail a single job opportunity and are not “employment contracts.” ICs often work on a temporary basis, for a set period of time, or until a project is completed. They are also free to hire assistants and have full control over those they employ themselves.[3]
Employees may have freedom in how tasks are accomplished, but their employer generally controls and/or directs what services/tasks are performed and when they are performed. In contrast to ICs, employees are generally paid weekly, bi-weekly, or monthly. Typically employees are reimbursed for their expenses and provided with the tools or supplies necessary to complete the assigned tasks. For those with employment contracts, it is typical that they include benefits and are limited to a specific project duration. Employees’ roles are integral to the business and they likely perform multiple tasks for a single company. Employer liability is also greater for an employee’s actions. For example, if a worker commits a tort, such as crashing into another vehicle, the liability of the worker’s employer depends on the worker’s status. If the worker is an employee operating in the normal course of his work, it is likely that the crash victim can hold the employer vicariously liable for the accident.[4]
Again, it is not necessary that all the factors match a single category. Many worker/employer relationships are complex and, should a conflict arise, a court may need to decide which classification is appropriate given the circumstances.
Consequences
From an employer’s perspective, hiring ICs may be beneficial because they are not required to pay employment taxes and liability is less than that of employees. Employers are also not obligated to pay ICs minimum wage, overtime, vacation, or provide other benefits such as health insurance or workers’ compensation.[5][6]
However, the consequences of mischaracterizing an employee as an IC may require employers to pay back wages under the Fair Labor Standards Act and past due health insurance, retirement, and other benefits. The employer may also be subject to back taxes and penalties based on the IC/employee status for failure to pay employment taxes. Employees who have been misidentified as ICs may be subject to tax liability since the employer is not contributing to state and federal income tax on their behalf. Workers that believe they’ve been misclassified can visit the IRS’s website to fill out a form that will clarify their tax classification.
Cases
Most recently, Flowers Foods, Inc., the bakery that owns Wonder Bread, has come under fire for their classification of drivers as ICs. Almost two dozen lawsuits have been filed on behalf of the drivers and they were granted class action status in North Carolina in March of 2015. There is nearly $1 billion at stake in potential liability for back wages, fines, penalties, and heath care benefits. In early August of 2016, the U.S. Department of Labor launched an investigation into whether the company is in compliance with the Fair Labor Standards Act, which sets minimum wages and other employment standards.[7] The case comes on the heels of two other high-profile suits brought by the drivers of FedEx and Uber, which also alleged misclassification of employees as ICs. Both cases settled for millions of dollars.[8]
It is imperative that employers and workers think carefully about their employment classification. Workers may be entitled to health and retirement benefits as well as wage protections if they are classified as employees, but they may lack the autonomy of ICs. Employers should properly classify workers to avoid issues with state and federal tax entities and departments of labor. If you need guidance regarding worker classification as an employee or IC, it is advisable to speak with a legal professional. Please visit us at https://lindleylawoffice.com for more information.
[1] U.S. Small Business Administration, Hiring a Contractor or an Employee? https://www.sba.gov/starting-business/hire-retain-employees/hire-contractor-or-employee.
[2] Internal Revenue Service, Independent Contractor Defined, (Jul. 7, 2016), https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-defined.
[3] McCown v. Hines, 537 S.E.2d 242, 244 (N.C. Ct. App. 2000); State ex rel. Emp’t Sec. Comm’n v. Huckabee, 461 S.E.2d 787, 788 (N.C. Ct. App. 1995).
[4] Cook v. Morrison, 105 N.C. App. 509, 413 S.E.2d 922 (1992).
[5] Wage and Hour Act: N.C. Gen. Stat. Ann. §§ 95-25.1 to 95-25.25.
[6] Workers Compensation Law: N.C. Gen. Stat. Ann. §§ 97-1 to 97-101.1.
[7] Erica E. Phillips, Flowers Foods Faces Fair-Labor Review, The Wall Street Journal, (Aug. 10, 2016), http://www.wsj.com/articles/labor-department-taps-flowers-foods-for-fair-labor-compliance-review-1470834757.
[8] Id.
