Independent Contractors vs. Employees - Part II
© John J. Tormey III, Esq. All Rights Reserved.
This article is not intended to, and does not constitute, legal advice with respect to your particular situation and fact pattern. Do secure counsel promptly, if you see any legal issue looming on the horizon which may affect your career or your rights. What applies in one context, may not apply to the next one. Make sure that you seek individualized legal advice as to any important matter pertaining to your career or your rights generally.
Part I of this article discussed the distinction between hiring "independent contractors" versus "employees", and some of the consequences thereby resulting. How could, for example, a recording studio characterize its workers as the former, rather than the latter? If the Internal Revenue Service (IRS) or applicable Department of Labor (DOL) challenges the characterization of the workers, is there anything that the recording studio could have done in retrospect to prevent or withstand the challenge?
A signed written agreement between the recording studio and each worker, which among other things characterized each of them as an "independent contractor", might have been helpful. But do not believe for a minute that agencies like the DOL and the IRS will view that self-serving contractual characterization as fully dispositive. These agencies decidedly will not. Rather, the actual facts and circumstances surrounding the worker's services must give additional support to the contractual characterization. In other words, the hiring company should, at minimum, require all its independent contractor hires to sign independent contractor agreements. But the smart company also monitors the factual circumstances of that work relationship, to make sure that those facts support the contract and the "independent contractor" characterization.
This article will not rehash all factors in the IRS "checklist" here. The hiring party should update itself on the IRS and DOL checklist(s) anyway: (1) so to be sure to consider factors applicable to its own state and jurisdiction, and (2) so as to work off of the most updated list. Obviously it is wise to consult with one's lawyer and accountant before one rolls out a payroll plan - indeed, before the hiring party even make the hires. But below are some of the checklist factors which I have found to have been given significant weight in the context of past DOL actions. Query whether or not the hiring party will be able to "flip" any of them to its own favor and advantage, if the hiring party is ever challenged on its own worker characterizations:
A. Nature Of Services.
What exact services or types of services does the worker perform? If the hiring party is held to exercise or reserve the right to exercise sufficient supervision, direction, and control over the worker's services, an "employer-employee" relationship may be established, even if such relationship was never intended by the hiring party. To this extent, a written job description suggesting that the worker toils independently, may support the company's assertion of an "independent contractor" relationship. But the written job description must be an accurate reflection of the facts, and in any event is not dispositive. Moreover, most hiring parties are unwilling to relinquish supervision, direction and control over its hires, as a practical matter - much less do so in writing. Therefore, this is a difficult checklist factor for the hiring party to "flip" to its own advantage.
B. In Business For Himself/Herself.
Is this worker in business for himself or herself? For example, does this worker run his or her own business or corporation, or work through a "loan-out" entity? Does the worker have an independent consultant business? Does the worker advertise any business, or have the trappings or indicia of any business? If the worker is in business for himself or herself, that would be a strong suggestion that the worker is an "independent contractor". In fact, the party wanting to hire a worker can choose to limit its hires only to those contractors that are already separately incorporated. This is therefore a factor that can be flipped to the hiring party's advantage, if set up carefully in advance.
C. Invoicing Or Billing For Services.
Does the worker submit a bill or invoice? Most employees don't. Most independent contractors do. Again, this is a factor that the hiring party can flip to its advantage, if set up carefully in advance. The party wanting to hire a worker can choose to limit its hires only to those contractors that furnish or are willing to furnish periodic invoices. This factor will not be dispositive by itself, but could be helpful to the hiring party.
D. Where, When And How Long.
Is this worker told where to work each day? When to work each day? How long or how many hours to work each day? A worker toiling off-premises is more likely to be characterized as an "independent contractor". A worker on his or her own schedule is more likely to be characterized as an "independent contractor". And, a worker who chooses his or her daily hour expenditure is more likely to be characterized as an "independent contractor". But again, most hiring parties are unwilling to relinquish that kind of supervision, direction and control over their hires.
E. Review Of Work.
Is this worker's effort subject to review by anyone? Is the worker's effort reviewed as "satisfactory" or "unsatisfactory"? The more discretion of review that the company exercises, the more likely that this worker will be characterized as an "employee". But again, most hiring parties are unwilling to relinquish that kind of supervision, direction and control over their hires.
F. Refusal Of Work Assignments.
Can this worker refuse work assignments? Does this worker in fact refuse any work assignments? If so, what happens as a result? Though not an absolute, a worker entitled to refuse assignments is at least somewhat more likely to be characterized as an "independent contractor". But again, most hiring parties are unwilling to relinquish that kind of supervision, direction and control over their hires.
G. Tools And Office Space.
What equipment or other tools or objects does this worker supply or bring to the job site by himself or herself? Who provides the office space, if any? The more equipment and tools that the worker brings to the work site, the more likely it is that the worker will be characterized as an "independent contractor". If, on the other hand, the company provides an office, tools and equipment, the relationship looks more like an employment relationship. In this day and age of laptop and telecommuting, we will more frequently see hiring parties try to flip this variable to their advantage.
Please do not rely upon the excerpted list of factors above - it is only illustrative. Any determination that a hiring party makes about a worker's status should be done only upon review with one's own lawyer and one's accountant. The most important thing to remember is that the rule of "ipse dixit" does not apply. In other words, just because the hiring party calls someone an "independent contractor", does not make them so! ("Ipse dixit" is Latin for "he himself said so"). There are structural modifications that the hiring party can make to the hiring relationship that will increase its chances of successfully claiming the worker to be an independent contractor, but there are seldom any absolutes in this regard. Finally, keep in mind that there is a real "Catch 22" to the independent contractor characterization. The hiring party must truly be willing to part with a substantial amount of supervision, direction and control over a worker - and must in fact do so - in exchange for the privilege of paying them like an independent contractor. There is only a very limited extent to which a hiring party may be able to contract around this problem.
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