Consequences can be ruinous for construction and interior design firms that fail to properly identify workers as employees, and instead wrongly classify them as independent contractors. Lawsuits and government enforcement actions can result.
Companies wishing for a quick test to determine contractor vs. employee classification can refer to Alexander versus FedEx Ground Package System. On Aug. 27, 2014 the California-based Ninth Circuit Court ruled individuals driving for Federal Express were not independent contractors despite owning their own vans and being allowed to set their own routes. The court used several factors in its ruling. The most notable among these factors concerned the company’s control over the drivers.
“Drivers must wear FedEx uniforms, drive FedEx-approved vehicles and groom themselves according to FedEx’s appearance standards. FedEx tells its drivers what packages to deliver, on what days and at what times. Although drivers may operate multiple delivery routes and hire third parties to help perform their work, they may do so only with FedEx’s consent.”
The U.S. Department of Labor’s economic realities test can be useful to help determine contractor versus employee classification status:
- The extent to which the work performed is integral to the employer’s business
- Whether the worker’s managerial skills affect his or her opportunity for loss
- The relative investments in facilities and equipment by the worker and employer
- The worker’s skill and initiative
- The permanency of the worker’s relationship with the employer
- The nature and degree of control by the employer
An employer can consider these additional metrics to identify the degree of control it has in its relationship with the individual working on its behalf to determine whether that person is an employee or an independent contractor.
- Does the employer control or have the right to control what the worker does and the manner in which the worker does the job?
- Does the employer control business aspects of the worker’s job? How is the worker paid? Are expenses reimbursed? Who provides tools and supplies?
- Is there a written contract or are there employee benefits, such as a pension plan, insurance or vacation pay?
- Will the relationship between the employer and worker continue? Is the work performed a key aspect of the employer’s business?
The fact that a true independent contractor is an individual who runs his or her own business is another easy to identify metric.
While a business may pay an independent contractor and an employee the same rate for the same or similar work, there are important legal differences between the two.
- The company withholds income tax, Social Security and Medicare from wages paid to an employee
- The company does not withhold taxes for an independent contractor
- Employment and labor laws do not apply to independent contractors
Of course, businesses pay no income tax withholding or unemployment and workers’ compensation premiums if they hire workers as contractors. As a result, both states and the federal government are aggressively seeking to determine which companies could be breaking the rules by misclassifying employees as independent contractors. For more information at the federal level visit the IRS website. For state-specific information visit state workforce agencies.
An insurance broker can guide you regarding contractor versus. employee classification, while also guiding you on risk transference through insurance products.
Ingrid Dunlap is a risk manager at KMRD Partners Inc., a risk and human capital management consulting and insurance brokerage firm with offices throughout Pennsylvania. She can be reached at firstname.lastname@example.org.