Determining the relationship

Hiring employees versus using independent contractors gives the employer different rights and responsibilities.  With an employee the employer must do things like pay workers compensation, pay social security and medicare, pay unemployment insurance, pay federal, state, or local minimum wage, overtime, and holiday pay, they also must pay the company’s health insurance and contributions to retirement plans, if applicable.  Aside from the monetary liability there may also be different legal liability the business owner could face; not knowing the difference between employees and independent contractors could leave a business owner vulnerable to many issues. 

An employee is someone that a business owner hires for an indefinite period of time to do work as assigned by the employer.   An employee is given the tools needed to complete the job, a space in which to the work, and the work should be done in the manner required by the employer.  

On the other hand, an independent contractor generally does the following:

1. Brings their own tools;

2. Has their own employees;

3. Has their own business license;

4. Files their own taxes;

5. Maintains their own separate business checking account;

6. Invoices for any work done;

7. Keeps their own business records; and

8. Are free to work for more than one client at a time.  

The business owner does not supervise the independent contractors work nor the work of the employees hired by the independent contractor.  To show that they are not supervising the business owner must only schedule and inspect the work, but must not tell how to do the work. This degree of control over the work is an important concept when determining if there is an employee/employer relationship or not.  

Monetary and Legal Liabilities

If a person who was hired as an independent contractor later realizes they were not being treated as an independent contractor but more as an employee they may sue for back payment of any of the monies they paid to federal, state, and local governments that an employer is generally responsible to pay.  These can include money that should have been paid to the withholding tax, unemployment insurance, and workers compensation.  

An independent contractor may also sue the business owner if they are injured on the job site, if the injury is caused by negligence of the business owner or their employees.   While an employee is covered under workers compensation and independent contractor is not.  Therefore, and independent contractor may sue the employer directly for actual damages, compensatory damages, and lost earnings.

When harm to third parties occurs the difference between having an employee and using an independent contractor are especially important.  An employer is vicariously liable to third parties for its employees’ acts.  While an employee is acting within the scope of their employment the employer is responsible under the legal theory of ‘respondeat superior.’  If an employee injures a third party while performing duties of employment, the third party may sue the employer and hold the employer liable to the same extent the employee is liable. If a company hires an independent contractor the employer is not liable.  Instead, only the independent contractor may be sued.   The person suing will generally try to go after the person with the most money, which generally tends to be the business owner, thus it is very important that business owner can prove the relationship was that of independent contractor. The lines cannot be blurred. 

Tips for using an independent contractor

For the reasons stated above it is important to treat an independent contractor as such, if that is the relationship you want.  It is generally wise to meet with someone who has knowledge of employment law and who can help to ensure you maintain a proper working relationship. When hiring an independent contractor try to meet as much of the criteria as possible; get copies of the independent contractor’s business license, insurance information, evidence that they pay their own taxes, have a stated beginning and ending date, and have the contractor supply invoices for any payments they are owed. There should be a written contract describing the relationship and stating the type of relationship the parties intended to create.   The employer should not control the work being done or the time it is being done (unless this is imperative to the work).  The employer may only state what work is to be done and they may give a deadline of when the work is due. 

While having everything written down may help, a court will look past an agreement and determine the relationship based on the actual work being done and the degree of control used by the employer.  It is up to the parties to act in such a way that defines the terms of the relationship. 

As always, please contact me with any questions you may have and good luck!