1. My company is growing! Should we hire an employee or an
independent contractor?
2. How can I tell whether a particular individual qualifies as a
contractor or an employee?
3. Should we train and supervise independent contractors like we
train and supervise employees?
4. How do we convert an independent contractor into a regular
employee, and vice versa?
5. What is the difference between a contract our organization
presents to a new employee and a contract we present to a new
independent contractor?
6. Hypothetical fact patterns and example scenarios (time permitting).
1. My company is growing! Should we hire an employee or an
independent contractor?
Whereas contractors are lawfully treated like a vendor, employees enjoy
a large amount of government-mandated rights imposed upon
employers. These include the Fair Labor Standards Act, wrongful
termination laws, anti-discrimination laws, fringe-benefit neutrality, and
overtime wage requirements. Employers must also pay numerous costly
expenses for employees, such as workers compensation insurance,
unemployment tax, and FICA. No such expenses exist for independent
contractors, and in fact moneys paid to them are a straight deduction on
the company’s expenses.
As discussed more fully below, determining whether staffers meet the
criteria of contractors, involves considering the following questions: (1)
Are these individuals permitted to accept work from other entities, or are
they bound by a non-compete clause to only work for your organization?
(2) Do they spend so much time every week working for your company
that they, effectively, could not work for any other entity or business? (3)
Must they work 12 consecutive months of every year (except for vacation
days), or would your company permit one of these individuals take a
month off, or a season off , and then resume work for the company? (4)
Must all of their work be performed at the company’s facility, using its
office equipment, or can they perform some work from home and using
their home computer? (5) Must their work be performed during the
company’s office hours, or can they choose to do some work during the
evening or weekend?
2. How can I tell whether a particular individual qualifies as a
contractor?
The IRS and the state’s Department of Revenue consider the various
nuances and details of each case to determine whether an employer-
employee relationship is taking place. Arizona statutes, like the federal
Internal Revenue Code, define an employee as a person who performs
services subject to control of the employer. A contractor, on the other
hand, has greater flexibility in choosing whether to work year-round,
whether to accept work assignment from more than one company or
agency, where to conduct work assignments, and so forth. Legal
synonyms for contractor include freelancer, service provider, supplier,
and consultant.
As an aid to determining whether an individual is an employee or a
contractor, the IRS has identified approximately 20 factors as indicating
whether sufficient control is present to establish an employment
relationship. These elements are based on cases and rulings, and the
degree of importance of each factor varies greatly depending on the
occupation and the factual context in which the services are performed.
1. INSTRUCTIONS. A worker who is required to comply with other
persons' instructions about when, where, and how he or she is to work is
ordinarily an employee. This control factor is present if the company for
which services are performed has the right to require compliance with
instructions, not necessarily whether the company actually exercises that
right.
2. TRAINING. Training a person by arraigning for an experienced
employee to work with that person, by requiring the person to attend
meetings, or by using other methods, indicates that the company wants
the services performed in a particular manner and consequently is an
employer.
3. INTEGRATION. Integration of the person’s services into the business
operations generally shows the person is subject to direction and control.
When the success of a business depends upon the performance of
certain services, the persons who perform those services must be
subject to a certain amount of control by the owner of the business, and
consequently are more likely to be employees.
4. SERVICES RENDERED PERSONALLY. If the services must be
rendered personally, rather than being subcontracted out, the person
providing those services is more likely to be an employee.
5. HIRING, SUPERVISING, AND PAYING ASSISTANTS. If the company
hires, supervises, and pays assistants to help the person perform her
services, that person is more likely to be an employee. In contrast, if a
person hires, supervises, and pays her own assistants pursuant to a
contract under which she has agreed to provide materials or labor, and
under which she is responsible for the attainment of a result, this factor
indicates an independent contractor status.
6. CONTINUING RELATIONSHIP. A continuing relationship at frequently
recurring intervals between the person and the company indicates that
an employer-employee relationship exists.
7. SET HOURS OF WORK. The establishment of set hours of work is a
factor indicating control, and therefore indicating employee status.
8. FULL TIME REQUIRED. If the person must devote substantially full
time to the business, such person is impliedly restricted from doing other
gainful work and therefore seems like an employee. An independent
contractor, on the other hand, is free to work when and for whom she
chooses.
9. WORKING ON FIRM’s PREMISES. If the work is performed on the
company’s premises, that suggests control over an employee, especially
if the work could be done elsewhere. Work performed off premises, such
as a home office or a coffee shop, indicates freedom generally
associated with independent contractors.
10. SEQUENCE SET. If a person must perform services in an order or
sequence set by the company, that factor shows the person is not free to
follow her own pattern of work but must follow the company’s established
routines and schedules.
11. VERBAL OR WRITTEN REPORTS. A requirement that the person
submit regular or written reports to the person or persons for whom the
services are performed indicates a degree of control.
12. PAYMENT BY HOUR, WEEK, MONTH. Payment by the hour, week, or
month generally points to an employer-employee relationship, provided
that this method of payment is not just a convenient way of paying a lump
sum agreed upon as the cost of a job. Payment made by the job or on
straight commission generally indicates the person is an independent
contractor.
13. PAYMENT OF BUSINESS OR TRAVEL EXPENSES. If the company
ordinarily pays the person’s business or travel expenses, the person is ordinarily an employee.
14. FURNISHING OF TOOLS AND MATERIALS. If the company furnishes
significant tools, materials, and other equipment, it tends to show the
existence of an employer-employee relationship.
15. SIGNIFICANT INVESTMENT. If the person invests financially in
facilities that she uses to perform her services (such as paying rent on
her office, paying her own trade-organization membership dues, paying
for her own Internet subscription and computer) that factor tends to
indicate that the worker is an independent contractor.
16. REALIZATION OF PROFIT OR LOSS. A person who can realize a
profit or suffer a loss as a result of her services is generally an
independent contractor. If the person is subject to a real risk of
economic loss due to investments or expenses, that factor indicates that
the worker is an independent contractor.
17. WORKING FOR MORE THAN ONE FIRM AT A TIME. If a person
performs more than de minimis services for a multiple of unrelated firms,
that factor generally indicates that the worker is an independent
contractor.
18. MAKING SERVICE AVAILABLE TO GENERAL PUBLIC. The fact that a
person makes her services available to the general public on a regular
basis indicates an independent contractor relationship.
19. RIGHT TO DISCHARGE. The right to discharge a person is a factor
indicating that the worker is an employee and the person possessing the
right is an employer. An employer exercises control through the threat of
dismissal, which causes the worker to obey the employer's instructions.
An independent contractor, on the other hand, generally cannot be fired
for personality conflicts or other reasons so long as the independent
contractor produces a result that meets the contract specifications.
20. RIGHT TO TERMINATE. If the person has the right to end her
relationship with the person for whom the services are performed at any
time he or she wishes without incurring breach-of-contract liability, that
factor indicates an employer- employee relationship.
3. Should we train & supervise independent contractors like we train
& supervise employees?
Our society has become increasingly litigious. Consequently, companies
should institute risk-management policies that include oversight and
accountability of staff, consultants, and volunteers. Furthermore,
nonprofit status subjects its board members to the particularly high level
of a “fiduciary duty”.
Companies are subject to lawsuits for the negligence of their employees
and other “agents”, if a plaintiff can show the company failed to
supervise, train, evaluate, or other failure oversee that “agent” in such a
way that would have prevented the negligent act. The negligent acts of
employees or contractors could include anything from client privacy
violations to sexual harassment of support staff. To minimize the chance
that such negligence would occur, or that responsibility would flow
vicariously to the company rather than remaining with the individual,
companies should show a paper trail or regular supervision and
evaluation.
Organizations should have a system in place for regular, written
evaluation by supervisors. New employees should receive an orientation,
which includes a review of the organization’s personnel policies and
procedures manual. Staff should be provided with a copy of the
personnel policies and should acknowledge receipt in writing. The same
risk-management structure should exist for independent contractors, to
the degree those contractors have contact with the company’s
customers, clients, staff, or other potential plaintiffs. Nonprofits that
routinely review the performance of their staff, contractors, and
volunteers reap tremendous benefits. The evaluation process nips many
labor problems in the bud.
Performance evaluations can keep organizations out of legal trouble by
documenting problems. Should the company need to fire a worker or
cancel a contract with an independent consultant, the company will have
written proof that a supervisor provided notice and a chance to correct
the problem -- which can convince a jury or judge that the company
acted fairly and did not breach a contract nor committed a wrongful
termination.
4. How do we convert an independent contractor into a regular
employee, and vice versa?
Hiring a contractor or consultant to join your staff is easier than
converting a current employee into an independent contractor.
Concerning the operational mechanics of reclassifying employees as
contractors: Be sure that all affected individuals sign a notification letter
at least several weeks before the conversation takes place. This letter
can be short, so long as it informs its recipients that the company is
eliminating their position as that of an employee starting on a certain
date, that the company would like to engage them as the contractors who
will perform that role, what they will be paid, whether they will be eligible
for fringe benefits, and so forth. The notification letter should also say
something to the effect of, “Independent contractors are responsible for
paying their own self-employment taxes. Rather than mailing you an IRS
Form W-2 each January, we will now mail you an IRS Form 1099. Be sure
that you report these earnings on Schedule C of your Form 1040, and
consult with a tax professional if you have questions regarding tax
reporting.” It should conclude by stating, “If you agree to these terms,
and would like to be engaged as an independent contractor starting on
that date, please sign the space below and return this letter to your
supervisor.”
5. What is the difference between the contract our organization
presents to a new employee and to a new independent contractor?
Both types of contracts will likely include the following clauses:
• Scope of services.
• Compensation.
• Proprietary company information.
• Confidential client information.
• Return company documents upon separation.
An employment contract is more likely include the following clauses:
• At-will employment.
• Non-compete and non-solicitation clause.
• Representations of Former Employment.
An independent-contractor agreement is more likely to include the
following clauses:
• Independent contractor.
• Term of agreement.
• Intellectual property.
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