If it walks like a duck and talks like a duck, it’s a duck. In other words, if you are treating the ‘independent contractor’ like an employee by doing things such as providing work materials and office space, designating working hours, providing training and direction regarding how and when to perform the work, then the ‘independent contractor’ is most likely an employee. Independent contractor is defined by the Fair Labor Standards Act, IRS regulations, and the decisions of some courts. Many states also have specific independent contractor regulations. The IRS and many states have adopted common law principles to define an independent contractor. These rules focus primarily on the level of control an employer has over a service or product. For independent contractors, the company can direct or control only the result of the work done, and not the means and methods in getting to the result.
The rules are not always clear-cut to determine the correct status, but generally characteristics of an Independent Contractor include:
- The work assignment is temporary and typically for a specific project; and
- The work assignment is not an integral part of the business and is not something typically done by employees.
The Independent Contractor will:
- Supply his or her own equipment, materials and tools;
- Pay for their own expenses;
- Control the hours worked;
- Determine how and when to perform the work;
- Retain a degree of control and independence;
- Operate under a business name and has his/her own employees; and
- Advertise his/her business’ services and has more than one client.
Some courts and federal agencies use an “economic realities test” which looks at the dependence of the worker on the business. If a large portion of a worker’s salary is from one specific company, this may qualify them as an employee. Other factors considered are level of skill, integral nature of the work, intent of the parties and payment of social security taxes and benefits.
Misclassification of an individual as an independent contractor may have a number of costly legal consequences such as reimbursement of all wages including overtime, taxes and penalties for federal and state income taxes, social security, Medicare and unemployment, providing employee benefits and workers compensation for any injuries.
There is no set number of factors that makes the worker an employee or an independent contractor. Also, factors which are relevant in one situation may not be relevant in another. The best approach is to look at the entire relationship, consider the degree or extent of the right to direct and control the work, and be sure to document all factors used in your determination process.
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