Independent contractors. Every business needs them, but do yo, as an employer, know the difference between an independent contractor and an employee? Are you sure that the people who are designing your ad agency’s graphics or doing the bookkeeping for your trucking company really are freelancers? Are you positive that they are not eligible for benefits such as unemployment? Would the Department of Labor agree with your assessment of who is your employee and who is a contractor?
Attorney Mark Tabakman advises employers throughout the country on all aspects of labor relations and employment law, and on the development of corporate employment policies. He speaks on “Navigating the Legal Minefields of Hiring, Firing and Independent Contractor Status” at a Mercer NJAWBO meeting on Thursday, September 14, at 6 p.m. at the Harrison Conference Center at Merrill Lynch. Cost: $40. Register online at RSVPmercerdinner@yahoo.com.
The line between who is an employee and who is an independent contractor can be very fine, says Tabakman, an attorney with Grotta, Glassman and Hoffman in Roseland who received his bachelor’s degree from Cornell and his J.D. from Rutgers.
He emphasizes that different state and federal agencies have different standards for what determines employee versus independent contractor status. “It can be a very gray and confusing area,” he says. “Each agency, such as labor or equal rights, has its own tests. But basically all of the different groups base their decision on two prongs.” The first prong is control. The second is a determination on whether or not the contractor has his or her own business separate from the employer’s business.
Independence. To qualify as an employee, “the employer must exercise control over the person,” says Tabakman. “For example, a plumber comes into your house to fix your toilet. You don’t hand him the tools and say, ‘use this screwdriver.’ He chooses how he will do the job and at the end of it he gives you a bill to pay.”
An employee, on the other hand, is told how to accomplish the task. His payment is based on number of hours worked, rather than on whether on not the task is accomplished at the end of that time period. “If he is paid a certain amount per hour rather than per job, that can be an issue,” says Tabakman.
Benefits. If a company supplies health insurance, paid vacation hours, or personal days to a deliverer, doctor, or dog groomer doing work for it, that person is almost certainly an employee. If that deliverer, doctor, or dog groomer has an assistant or helper and the employer has a say in who that person is, it probably means that an employer-employee relationship exists. Should a question of status arise, the department of labor will look into these factors.
Business ownership. Does your contractor have his own business? This can be difficult to establish, and if a governmental agency questions whether the contractor does own a business, it is up to the employer, not the contractor, to make the case, says Tabakman. A business card is one possible proof, but an even better proof is an ad in the telephone book.
To be really safe, he recommends that employers use independent contractors who are incorporated. “Making payment from one company to another is good proof that the person is not your employee,” he says. Another good piece of evidence is an employer ID number. Better yet, if the contractor makes his own unemployment payments it is “an almost ironclad defense” that he or she is a contractor and not an employee.
Hours. Another area the government will look at is the number of hours the contractor works for the employer, and what percentage of his total number of hours, or total income, comes from that employer. “If the person is working 40 hours a week for one employer, it can be difficult to prove that he is an independent contractor,” says Tabakman.
Don’t pay independent contractors on an hourly basis, he advises. Instead pay in a lump sum based on work completed.
Record keeping.Audits by the Department of Labor are usually triggered when a person loses a job and applies for unemployment compensation. The person claims he was employed by the company, but there are no records of unemployment being paid in his name. This will often trigger a complete audit of all employees and can end in huge fines for a company if the finding goes against it.
“The potential liability is significant,” says Tabakman. “The unemployment statute of limitations is four years. This can add up to a lot of money for an employer, hundreds of thousands of dollars.” He says that he recently won a case where the state was ready to levy fines of over $130,000. But that employer was able to prove that the workers in question did in fact own a business, and therefore were independent contractors.
During an audit, every factor comes into play. “Does the person have several 1099s (the annual IRS form for reporting payments to independent contractors, with no taxes withheld), or does he work exclusively for one company? Is there an agreement that the person is free to look for other work? Does he sit in the company office eight hours a day? The totality of circumstances will be judged.”
Workspace. Working in the employer’s office may be seen as control under some circumstances, but not in others. A contractor who works one day a week in a particular client’s office but still has several other clients and files income taxes as a business would not be considered an employee.
“I have a cinematographer friend who is the perfect example of an independent contractor,” says Tabakman. “He works a few days here, two weeks there. At the end of the year he has dozens of 1099s.”
While it may be tougher to prove, a person who works 40 hours a week in one client’s office may still qualify as an independent contractor. “Again, it is an issue of control. If the person is happy with one client, there is nothing that says they must go out and look for more work,” says Tabakman. The issue becomes whether he is allowed to look for additional work.
While labor laws can seem gray, murky and complex, understanding the basics is the best way to stay on the right side of the legal fence.