Tuesday, November 12, 2019

Independent Contractor or Employee?

I provide advice to some small businesses, and one question I often receive is whether they can classify their workers as independent contractors. We have discussed this topic on this blog before, but I think it is worth discussing it again. And with California requiring ride-sharing services to classify their drivers as employees, this topic is now in the news again. So what is the difference between an independent contractor and employee, and what happens if you classify an employee as an independent contractor?

An independent contractor is someone who enters into a contract with an employer to perform some specific task. For example, an independent contractor would be a plumber whom an employer calls periodically to fix problems with sinks or toilets. An employee is someone who works regularly for someone else, under that person or organization’s orders in a continuous relationship.

Here are some of the things courts look at to determine whether a worker is an employee:
  • How much control does the employer have? If the employer tells the worker what to do, how to do it, when to do it, and provides the worker with the resources to do it (e.g., tools, workspace, information) then a court will classify the worker as an employee. The more the employer dictates how the task will be performed, the more likely the worker will be an employee.
  • Payment. Is the worker paid when a particular task is performed? Or is he or she paid regularly? Regular payment is evidence that the worker is an employee. Also, if the employer is paying for the employee’s costs, like reimbursement for travel expenses or purchasing equipment, that is also evidence that the worker is an employee. If the worker is able to realize a profit or loss from his labor, he or she is more likely to be considered an independent contractor.
  • Longevity of relationship. If an employer and a worker have a continuous relationship, this will be evidence that the worker is an employee. Sporadic, short-term commitments are evidence the employee is an independent contractor.
The consequences of misclassifying an employee as an independent contractor can be significant. First, the employer will owe its share of employment taxes. Secondly, if that “independent contractor” worked over 40 hours in any week, the employer will may liable under the FLSA for overtime and related damages. Third, with recent amendments to the Employee Classification Act (820 ILCS 185/1, et seq.), misclassifying an employee could result in the employer being fined.

If you have questions about how to properly classify your employees, contact me (email: mdicianni@ancelglink.com, phone: (312) 604-9125) for advice.