Volume 39, Issue 8, August  2004

LegalEase

Who's Working For You?
The Blurry Line Between Employees and Contractors
by David Barron

It is true, that with minor exceptions, labor and employment laws apply only to employees. if an individual is an independent contractor, he need not be paid a minimum wage under federal and state wage hour laws. However, if an employer misclassifies an employee as an independent contractor, the exposure to liability can be quite substantial. In addition to liability for not withholding taxes and paying unemployment contributions under various federal and state tax laws, liability may also arise from a myriad of other federal and state statutes and regulations that affect the employer/employee relationship. 

To make matters more difficult, every area of the law has its own definition and test for who is an employee. Often, both a business and a worker opt for an independent contractor relationship, only to learn through an audit by a governmental agency that the individual is actually an employee. 

Another example that highlights the need to properly classify workers relates to “respondeat superior” in tort law. This is a legal term that basically means an employer is automatically liable, by virtue of the employment relationship, for the wrongs committed against other persons or property by employees acting in the scope of their employment. While employers are traditionally held liable automatically for the wrongs of their employees, they are not necessarily held liable for the wrongs committed by those workers deemed independent contractors. when an employee is injured on the job, he cannot generally sue the employer individually, due to a workers’ compensation exclusivity clause. an independent contractor can sue. 

Employees vs. Contractors

The key to avoiding legal liability necessarily involves understanding whether an individual or group of workers qualify as employees or independent contractors. Title VII of the Civil Rights Act, which prohibits an employer from discriminating against an employee, defines an employee as “an individual employed by an employer.” Even the U.S. Supreme Court stated this definition “surely qualifies as a mere nominal definition that is completely circular and explains nothing.”

Although the test for determining independent contractor status varies, depending upon the statute involved and/or the government agency involved, three tests have been devised by the courts to unravel the employee/independent contractor conundrum. The first is the traditional common law agency test, turning on the employer’s “right-to-control.” This test was replaced in FLSA cases by an “economic realities” test under which workers are considered employees if they, as a matter of economic reality, are dependent upon the business to which they render service. The third test is a hybrid that considers the economic realities of the work relationship as an important factor in the calculus, but which focuses more on the extent of the employer’s right-to-control the means and manner of the worker’s performance. Regardless of the standard used, regulatory agencies generally begin with the proposition that most workers are employees, and it is the employer-entity burden to convince them otherwise.

There may be numerous advantages to using independent contractors, but care must be taken to limit the risks of potential employer liability. The failure to delineate the status of a worker or a group of workers correctly can expose an employer to tremendous legal liability. 

To minimize the risk of liability, employers should immediately evaluate all existing independent contractor relationships. Independent contractors must be easily distinguishable from other employees. To help ensure that independent contractors are treated as such in the event of litigation, the employer should relinquish day-to-day control over the manner and means by which a worker performs his/her tasks. Treat contractors with the same respect that regular employees enjoy. Inform contractors of the company’s policies and procedures and require that they adhere to the same conduct and performance standards required of all regular employees. 


USG

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