By Jeffrey Steinberger   |   May 7, 2007

Whether a person working for you is your employee or an independent contractor has one very important legal consequence: liability. Say you hire a company to paint your real estate office. During the work, a painter falls off a ladder breaks his arm. Falling paint damages computers that weren’t properly covered. Are you liable for the damages?

The general rule is that an employer is legally responsible for the negligence of his or her employees, but not for the negligence of an independent contractor. As with most broad legal principles, there are many exceptions. However, the general rule applies in most common circumstances.

So what are the differences between an employee and an independent contractor? There are a number of factors that determine which category a worker falls into. The most important of these is called the right of control. Does the employer have the right to exercise control over the worker? Basically, this means that the employer has the right to hire and fire the worker. But it also means the employer has the right to dictate both the means and the manner in which the worker performs the job. If this is the case, then the relationship is that of an employer and an employee. However, if the employer can control only the final results of the work, then the parties have an employer-independent contractor relationship.

Other factors that determine the nature of the relationship between an employer and a worker include:

• whether the worker is engaged in a distinct occupation or business
• whether the employer performs any required supervision
• how much skill the work requires
• who supplies the tools and equipment necessary for the work
• the length of time needed to perform the job
• whether payment is based on time or by the job
• whether the work is part of the regular business of the employer
• whether the parties believe they are employer and employee

How do these factors apply to our example? As owner of the real estate office being painted, you employed the painting company to do the work. However, you can’t hire or fire the employees of the painting company–including the one who fell off the ladder. You can control the final results of the work, such as the color of the paint used. However, you can’t dictate how the painters do the actual painting, and you don’t provide the paint, brushes, ladders, drop cloths and other needed materials.

Painting like this is usually skilled work done by a painting company. Yourbusiness is real estate, and you aren’t supervising the painters’ work. The job is for a limited period of time, perhaps a few days or more depending on the size of your office. You pay by the job and not by how long the job takes. Clearly, you don’t believe the painters are your employees. So in this case, there would be no dispute that all damages caused by the falling painter will be the liability of the independent contractor.

By Michael J. Lotito   |   August 12, 2010

Businesses that employ independent contractors may be more vulnerable than ever to private lawsuits and government scrutiny. Private actions involving alleged improper independent contractor classifications under the Fair Labor Standards Act (FLSA) and state wage and hour laws are on the rise. At the same time, the federal government has focused its attention on employers’ compliance with the rules governing worker classifications, and state governments have tightened their enforcement efforts.

Unlike employees, independent contractors are not covered by federal or state wage and hour laws, are ineligible for employee benefits such as health insurance and participation in company retirement plans, and cannot form or join labor unions. Additionally, employers are not required to pay Social Security, Medicare and unemployment taxes, or withhold and remit income taxes for independent contractors.

While companies are not prohibited from employing independent contractors, they can get in trouble for improperly classifying employees as independent contractors. Worker misclassification can result in substantial liability for unpaid wages, and taxes, penalties and fines, among other consequences.

To further complicate matters for employers, the analysis for determining whether a worker should be classified as an employee or an independent contractor can vary depending on which of its obligations the company is considering. For example, state regulators examining whether a worker is entitled to unemployment compensation may determine that a worker is an independent contractor under state law while the IRS may decide the worker is an employee entitled to participate in the company retirement plan under the Employee Retirement Income Security Act (ERISA).

Legislation pending in Congress could make it more difficult for companies to employ independent contractors. The Employee Misclassification Prevention Act (H.R. 5107/S. 3254) would increase penalties for misclassification under the FLSA, require employers to notify workers of their classification in writing, and direct states to strengthen their own penalties for worker misclassification.

While there are different tests for determining employee vs. independent contractor status, a key common factor is whether the worker or the company controls the manner in which the work is performed. The more a worker–rather than the company–controls where, when and how the work is performed, the more likely an independent contractor relationship exists. Similarly, individuals who can work for other clients and can subcontract their work are more likely to be classified as independent contractors.

Additional considerations for determining a person’s status include the following:

• If a person is on the company’s health-care plan, he or she may be an employee.
• If a person uses his or her own supplies and equipment to perform the work wherever it is convenient, he or she may be an independent contractor.
• If a person cannot reject an assignment for fear of ending the relationship, he or she may be an employee.
• If a person pays his or her own business and travel expenses, he or she may be independent contractor.

Whether someone is or is not an independent contractor is critical in determining many employer obligations. Making an incorrect designation can have enormous economic consequences. Employers should also routinely review independent contractor arrangements to make sure the relationship has not changed into an employment relationship. Companies can reduce their exposure to wage and hour class actions and government investigations by working through this complex issue with competent counsel.