Is Your “Independent Contractor” Really an Employee?
The attraction of being your own boss has drawn increasing numbers of workers from all kinds of professions to step out into the workforce as independent contractors. For many businesses, hiring (or perhaps re-labeling) a worker as an independent contractor would seem to promise many perks: no payroll taxes or benefits to pay, increased flexibility in staffing, and fewer potential management headaches, to name a few. Mislabeling a worker as an independent contractor, however, can be a costly pitfall for the unwary employer.
Under U.S. law, a worker is either an employee or an independent contractor. You can’t have it both ways. Making the correct determination is critical for both the employer and the worker. Several government agencies – such as the Oregon Bureau of Labor and Industries, the U.S. Department of Labor, and the Internal Revenue Service (IRS) – may examine whether workers are correctly classified. These agencies won’t rely on whether you’ve labeled someone as an “independent contractor” but rather will take a close look at the realities of the relationship when deciding the worker’s status.
Different state and federal agencies use different tests for
determining whether a worker is an employee or an independent
contractor. While it is important to learn the worker
status rules under the various laws and regulations governing
the workplace, just knowing that “all worker status tests
are not the same” is an important first step in reducing
legal risks. The following are some highlights from some
of the more commonly-used tests.
The once common "20 Common Law Factors Test" of the IRS has
been replaced by a new category test. This test examines
the worker-employer relationship in three areas:
1. Behavioral control. Part of what makes a contractor “independent” is her ability to control when, where, and how the work gets done. You can specify desired results, but not the methods used to get to them.
2. Financial control. How much control does the company have over a worker's pay, business expenses, and facility investment? Control suggests an employment relationship.
3. Other factors. These include the nature of any written agreements, whether the company pays benefits to the worker, and the length of the relationship. You should always have a written agreement with an independent contractor. Simply agreeing in writing that a worker is an independent contractor, however, will not suffice if other factors indicate that she is an employee.
Oregon’s revised independent contractor law became effective in 2006. To be considered an independent contractor by the agencies that follow the new Oregon law (such as the Oregon Department of Revenue), a worker must be:
• Free from direction and control;
• Engaged in an independently established business
(with characteristics such as its own location, its own risk of
financial loss, multiple clients, an investment in the
business, and/or the authority to hire and fire
assistants);
• Licensed, if a license is required for their
services; and
• Responsible for other licenses and certificates
needed to do the work.
Navigating these statutes can be challenging. Consult with your employment law attorney for the peace of mind that comes with knowing your workers are correctly classified. There are a number of other resources available. For example, state resources and classification guidelines are available at www.oregonindependentcontractors.com. For clarification with respect to federal taxes, you can file IRS Form SS-8 ("Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding").
Misclassifying a worker can be costly. State and federal agencies can impose back taxes, penalties, and interest on employers who misclassify their employees as independent contractors – and worker misclassification lawsuits have tripped up employers as sophisticated as Microsoft, costing companies millions of dollars. If you do make the decision to hire an independent contractor, make sure they’re correctly classified. Get a written agreement and, if appropriate, make certain the contractor is insured to reduce your potential risks.
Kurt Barker practices in the Employment Law and Litigation departments of Karnopp Petersen LLP. His practice emphasizes the defense and counsel of clients in all employment-related matters. Kurt can be reached at 541-382-3011 or keb@karnopp.com. This article was prepared with the assistance of Linda Ratcliffe of Karnopp Petersen LLP.