December 2007

EMPLOYEE OR INDEPENDENT CONTRACTOR?

A common scenario many business owners face is hiring an independent contractor, who operates as a sole proprietor, for a task where the possibility for injury exists. Yet, you fail to obtain Workers Compensation coverage for this person because you assume if they were injured on the job, their independent contractor status would prohibit a claim against your insurance.

What you may not realize, however, is that just because someone is a sole proprietor of a business doesn’t automatically make them an independent contractor if they come to work for you. They may very well be considered an employee.

Determining whether someone is an employee or independent contractor is complicated by the fact that three separate agencies, your state Workers Compensation Board, your state Department of Labor, and the IRS, each make a determination of status based on their own criteria. The IRS requirements can be found online at http://www.irs.gov. You can obtain state requirements by contacting your local Workers Compensation Board and Department of Labor office.

In spite of all of this seeming confusion, there are general rules of thumb you can utilize to determine if a worker should be considered an employee. The commonality among these criteria is that the employer directly controls the how, what, and when of the worker’s employment.

Direct Evidence of the Right to Control

• Do you have the right to require compliance with your instructions?
• Will you be training this person through meetings, classes, or apprenticeship with a more experienced worker?
• Will the worker’s services be integrated into your overall business operations?
• Do you set the number of hours this person will work?
• Will the worker devote full time hours to your business?
• Do you determine the order or sequence in which the worker’s tasks are performed?
• Is the worker required to submit regular oral or written reports?
• Do you pay the worker’s business expenses?

Method of Payment

• Do you provide this person with hourly, weekly, daily, monthly or other regular periodic payments?

Furnishing of Equipment

• Is the work being performed on your premises?
• Do you provide the worker with tools, materials, or other equipment?

Right to Terminate Relationship without Liability

• Do you have an ongoing relationship with the worker?
• Do you have the right to discharge the worker without liability?

The general criteria for determining whether a worker should be considered an independent contractor or employee are as follows:

• Does the worker perform services for several unrelated persons or firms at the same time?
• Does the worker make their services available to the general public on a regular and consistent basis?
• Does the worker realize profit or suffer a loss as a result of his/her services beyond the profit or loss ordinarily realized by employees?
• Does the worker invest in facilities used in performing services that are not typically maintained by employees?
  
• Will the sale of business assets provide the worker with a gain or recovery?
  If the worker suddenly stops working, is there contractual liability?

Remember, a worker’s status is subject to the particulars of the specific work to be performed. While someone may qualify as an independent contractor for one assignment, they may become an employee for the next job. Therefore, you must always re-evaluate the worker’s status on regular basis to ensure compliance.