Employee or independent contractor? How to properly classify workers.

Why is it important to properly classify workers as an employee or independent contractor?

The proper classification of workers is important for both employers and employees because incorrect classification brings severe penalties for employers and deprives employees of compensation and benefits.

Employers are increasingly being audited by state and federal agencies to confirm compliance with laws governing the classification of workers. If employers are found to have violated those laws they could face significant penalties, as well as the obligation to pay back wages and taxes for the wrongly-classified workers.

Conversely, employees may incorrectly be classified as independent contractors and consequently may be missing out on social security or Medicare benefits, state unemployment insurance or workers compensation insurance, overtime pay, or other standard benefits packages offered by the employer.

employee-or-independent-contractor-classification

What determines whether a worker is an employee or independent contractor?

There are several factors that must be considered in making this determination and no single factor is determinative. That being said, the most persuasive factor is whether the employer has a "right to control" the methods and manner of a worker's performance of the details of the job.

For example, if a person who hired a painter has the right to control the hours worked by the painter, the break periods allowed, the paint brush used, the method of applying the paint, or otherwise trained the painter to perform in a certain way then that is a strong indication the relationship is that of employer and employee.

While not as controlling as the "right to control" factor, the presence of the following factors are indicative of an employer-employee relationship while the absence indicates an independent contractor relationship: 

  • The worker can be fired without cause
  • The tools, equipment and/or place of work is not supplied by the worker
  • The relationship is permanent rather than temporary
  • The worker is paid a salary or an hourly wage
  • The worker is entitled to paid vacation, sick leave, etc.
  • The worker's job site or hours of work may be changed without the worker's consent

Conversely, the presence of the following factors are indicative of an independent contractor relationship while the absence indicates an employer-employee relationship: 

  • The worker is engaged in a distinct trade or business
  • The service rendered requires a special skill or training
  • The worker has an opportunity to profit or has the risk of loss
  • The worker offers services to the public rather than to one individual or entity
  • The worker has the right to employ assistants or substitutes
  • The worker has a substantial investment or cost in the work performed

The belief or intention of the parties is another factor that has been considered in determining the nature of the relationship. For example, if the parties intend or believe the relationship is that of employer-employee then that indicates an employment relationship.

Lastly, whether the worker's trade is customarily performed by employees or independent contractors is another factor to be considered.

As mentioned, all of the above factors should be considered when classifying a worker, with the "right to control" factor being the most important.

Given the many factors and varying weights of each factor, it is recommended that competent legal counsel is retained to ensure the worker is properly classified.