Independent Contractor or Employee? The Basics

 “If you are not happy with who you are,
you will never be happy with what you get.”

–  Unknown

ACTUAL “CASE HISTORY”: Ira was two years out of law school, but still unable to land his first full-time law job with a law firm. Over that time he had registered with a temporary help agency that specialized in part-time lawyers, and through that temp agency Ira had taken on some short-term assignments to help out law firms for specific cases. When the case was over, his job was over, too.

Some six months before coming to our firm for a consultation, through his temp agency Ira had been hired by a large law firm to work on a large case that was expected to last for two to three years. His job was to review documents and summarize them for the trial team. He worked at the law firm’s offices, was given a small office to work in, and expected to be there Monday to Friday, 9:00 am to 6:00 pm each day. Some weekends Ira was required to work, as well, especially if a deposition had been scheduled and the trial attorneys needed documents reviewed for it.

Unlike the law firm’s other attorneys, Ira received no benefits, no paid vacations, no paid holidays, no sick days and no 401k. It wasn’t a “real law job,” but it was enough to keep Ira afloat.

Ira didn’t see any difference between what he did and what the law firm’s associate attorneys did, and wondered why he was considered an “independent contractor,” and they were considered “employees,” and why he was not entitled to all of the benefits they were.

Ira had good reason to wonder, and much to gain by asking questions.  

LESSON TO LEARN: Our lives are full of different relationships, and often they can be unclear and confusing. Your doctor performs services for you, and you pay your doctor for those services. Does that make your doctor your employee? Why or why not? Can an employer use your services, and pay you for them, and still say you are not “employed?” Why or why not? If a partner in a company performs services for that company, and the company goes out of business, is the partner entitled to Unemployment Benefits? Why or why not? In each of these instances, the correct answer to the question is derived from the correct view of the underlying relation.

Despite frequent confusion and lack of clarity, we put a variety of different labels on people who (i) perform services and (ii) get paid. These labels include “employee,” “partner,” “independent contractor,” “vendor” and the like. Though each label has legal and financial implications, we often interchange them, sometimes to our benefit and sometimes to our detriment. As with everything else in life and at work, knowing what you are doing is most important.

The two “working relationship labels” that are most often confusing to people – and that get more people in “trouble” – are “employee” and “independent contractor.” Though there is no exact “bright line” test that differentiates the two, our analytical focus is always on one word: “control.”

a. What is an employee? An employee is under the “control” of his or her employer. The employer almost always (i) tells the employee what days and hours to work, (ii) tells the employee where he or she should work, (iii) tells the employee what work to do, (iv) tells the employee who will supervise his or her work, (v) tells the employee how much money he or she will be paid, (vi) tells the employee when he or she will get paid, and (vii) tells the employee how to do his or her work. That list of “control factors” is not exhaustive: in general, the employer “controls” all aspects of the employee’s work.

Also, an employee is generally provided by the employer the tools, equipment and supplies necessary to accomplish a task, whereas an independent contractor generally provides his or her own. In addition, the longer a working relation lasts, the more it is viewed as an employment relation.  

b. What is an independent contractor? An independent contractor is just what the title says: one who is “independent” of the employer’s total control, and “one who makes a contract” of sorts regarding the provision and payment for his or her services. Do you or does your plumber decide when he or she will perform services for you? Of course, the plumber does. Do you or your plumber decide how much the plumber gets paid? As a general rule, the plumber sets his or her own hourly rate. Do you provide your plumber with paid sick days, vacation or holidays? No. Do you supervise the plumber’s work? No. Overall, do you control your plumber? Hardly. For these several reasons, while your plumber provides services and you pay for them, there is no employment relation, but an independent contractor relation, instead.

Though there are many other factors we look for to determine whether someone is an independent contractor or an employee, “control” is the overriding issue.

The distinction between employee and independent contractor can be a blurry one, and it should not be surprising that, after reviewing all of the factors, one court might find that employment might exist, while another court might find that an independent contractor relation might exist. Nevertheless, a “best answer” almost always arises from a common sense review of the facts and circumstances of the parties’ interactions.

c. In a very few instances, the law dictates which working relation exists. For certain occupations, state and federal laws sometimes dictate which of the two working relations you can be. We call these “statutory employees” and “statutory non-employees.” For example, even if a person is clearly an independent contractor, if he or she does any one or more of the following, the U.S. Internal Revenue Service (“IRS”) requires employers to treat them as employees: (a) a driver who distributes beverages, meat, vegetables, fruit or bakery products, or who picks up and delivers dry cleaning, if his or her pay is fully or partly paid in commissions; (b) a full-time insurance sales agent primarily for one insurance company; and (c) an individual who works at home using materials supplied by the company and must be returned to you when not needed, if the company furnishes specific requirements for the use of the materials. These people are designated by the law as “statutory non-employees”: licensed real estate agents, direct salespeople, and certain home companions, provided each has a written agreement stating so.   

d. What difference does it make? The law requires that employers obey many laws regarding how they treat employees, which don’t apply to independent contractors. As examples, (a) employers must contribute about 7% over and above an employee’s income to the employee’s Social Security retirement fund, but are not required to do so for independent contractors; (b) employees must be protected by workers’ compensation insurance, in case they get hurt on the job; independent contractors have no such protection; (c) if an employee is not paid his or her earned wages, state labor departments of most states will assist them in their collection efforts; independent contractors are “on their own.” Employers are also required to make contributions for employees’ federal Medicare and state-required minimum disability coverage.

While many employers provide their employees with paid sick days, paid vacation, contributions to health care, and paid holidays, generally independent contractors do not get any such benefits.

On the other hand, independent contractors have certain advantages that employees do not. As examples, (a) they can charge whatever fees they can negotiate, (b) they can determine their own work schedules, (c) taxes are not withheld from their paychecks; they arrange for their own tax payments, (d) they can deduct from their income taxes their work-related expenses, and (e) they can have multiple “clients” at the same time. As I frequently say, “Being your own boss is either the best thing in the world, or the worst thing in the world, depending on who you are.”

e. Many laws protect employees, but not independent contractors. One important difference is that the federal and state discrimination laws protect employees, but they do not protect independent contractors. So, for example, it is entirely legal to decide that you want a doctor of a certain race, you don’t want a lawyer of a certain gender, or you want a plumber of a certain religion. “Discrimination” in the choice of which independent contractor to hire is not prohibited by the law, but is entirely legal. As another example, the Family Medical Leave Act (“FMLA”) provides employees with a right to time off to take care of a medical problem, but does  not provide these same protections to independent contractors. 

f. Many employers try to call people independent contractors in order to save money. The most common scenario seen by employment lawyers and Courts is for employers to try to characterize true employees as independent contractors in order to save money on such things as (a) employee benefits, such as vacation, sick days and health insurance; and (b) legally required payments, such as unemployment, Social Security contributions, and workers’ compensation coverage.     

g. The most important lesson is this: Once you know the differences between being an employee and being an independent contractor, you can (i) negotiate to minimize those differences to you, and/or (ii) file a complaint to get proper treatment. Though few understand this important lesson, it is the essential lesson to learn: (a) you need to know the differences between being an employee, on the one hand, and being an independent contractor, on the other hand, and (b) once you understand the differences, most – but not all – of those differences are negotiable.  

WHAT YOU CAN DO: Understand the difference between the two working relations, and understand, too, that you can negotiate and navigate the best of both relations. Here are the five basics you need to keep in mind:  

1. The first difference to resolve is that employees get common employment benefits: Employee benefits are given by employers to employees in order to attract and retain the best “human capital.” Though we have come to view many common employee benefits as entitlements – most notably paid sick time, paid vacation and employer-provided health insurance coverage – they are not required by law. Many employers try to give these benefits to their employees to attract and retain them, but deny them to others whose services they do not need in the longer term, or whose contributions they do not view as essential to running their companies. Independent contractors can – if they are deemed valuable enough – negotiate to either receive these benefits, or to be paid the money needed to purchase them.

2. The second difference to resolve: employees get contribution to retirement, unemployment and workers’ compensation: As a matter of law, employers must contribute to employees’ Social Security retirement funds in an amount approximating 7% of their income. Also, employers must give employees legally-required financial security in the form of unemployment insurance and workers’ compensation for injuries on the job. Independent contractors can – if they are deemed valuable – negotiate their own compensation level, and take the loss of these entitlements into account.

We offer two Model Independent Contractor Agreements which can be adapted for your use in efforts to negotiate to secure all possible compensation, benefits and freedoms. To obtain a copy of each, just [click here. ]   

3. On the other hand, Independent Contractors can have multiple clients, enjoy tax-related advantages, and gain substantial control over their daily lives: With increasing frequency, I hear people say that being in your own business has become more advantageous than being an employee, and the first thing they mention is freedom to live life as one sees fit. Perhaps to work from home, perhaps to work when desired, and perhaps even to decide to tell even the boss, “Just go away.” That said, as true job security becomes more and more an illusion, the supposed advantages of “job security,” and a regular paycheck is slowly diminishing. If employees are deemed valuable enough, they too can negotiate such freedom in their lives. 

4. Independent Contractors who feel they are really employees can raise an objection to their incorrect label, either anonymously or openly, either by themselves, to labor authorities or with legal counsel:  Not every independent contractor can negotiate higher pay to make up for the loss of the benefits and entitlements of being an employee. Many feel that they are being cheated by being falsely characterized as an independent contractor, and feel there is nothing they can do to correct this. It is true that raising an objection can end up in your losing your “job,” but there are ways to approach the problem in ways that pose a lower degree of risk:  

For those independent contractors who are still “on the job,” and who may be one of many people at the same company who are “treated and cheated” in this way, we often recommend consideration of transmitting an anonymous complaint to senior management.

For those independent contractors who are no longer “on the job,” but who wish they had been given the benefits and entitlement of employment while they were on the job, a respectful written request for recompense is suggested. If that does not work to gain payment of monies lost, then a formal complaint to the state labor board is suggested.

Finally, regardless of whether or not you remain “on the job,” a legal consultation with an experienced employment attorney licensed in your state might be helpful in deciding how best to regain the value of lost contributions and benefits.    

If you would like to obtain a list of at least five experienced “employee-side”  employment attorneys in your city, just [click here.]

5. One thing that can’t be negotiated: employees cannot negotiate away the many legal protections they are entitled to: Imagine if every employer said to every applicant for a job: “I will hire you, but only if you agree to be an independent contractor, and not an employee.” In that case, all of the many laws passed over the last 100 years to make employment in this society more civil, safer, and fairer – from minimum wage to FMLA to workplace safety – would instantly disappear. It is for this reason that employees cannot legally negotiate away the many legal protections they have been afforded, even if they are tempted to do so. Even if an employee signed an agreement in which he or she agreed to do so, it would not be enforced as “against public policy,” in the same way that a signed agreement to become a slave would be instantly and universally deemed a nullity.  

These are the five “basics” you need to know and bear in mind regarding “independent contractor vs. employee.” Forewarned is forearmed. Now you can both (a) negotiate and navigate the differences, and (b) if negotiation does not work, then file an objection to your improper treatment.  

SkloverWorkingWisdom™ emphasizes smart negotiating – and navigating – for yourself at work. Negotiation of work and career issues requires that you think “out of the box,” and avoid risks at every point in your career. Knowing these five steps you can take regarding the “independent contractor vs. employee” is the place to start. Now the rest is up to you.       

Always be proactive.  Always be creative.  Always be persistent.  Always be vigilant. And always do what you can to achieve for yourself, your family, and your career. Take all available steps to increase and secure employment “rewards” and eliminate or reduce employment “risks.” That’s what SkloverWorkingWisdom™ is all about.

*A note about our Actual Case Histories: In order to preserve client confidences, and protect client identities, we alter certain facts, including the name, age, gender, position, date, geographical location, and industry of our clients. The essential facts, the point illustrated and the lesson to be learned, remain actual.    

 Please Note: This Newsletter is not legal advice, but only an effort to provide generalized information about important topics related to employment and the law. Legal advice can only be rendered after formal retention of counsel, and must take into account the facts and circumstances of a particular case. Those in need of legal advice, counsel or representation should retain competent legal counsel licensed to practice law in their locale. 

 Repairing the World –
One Empowered and Productive Employee at a Time ™  
 

© 2012 Alan L. Sklover, All Rights Reserved.