Determining whether someone providing services to your business should be classified as an employee or independent contractor can often be tricky. The correct classification is not dependent on what you and the service provider want. Rather, there are a number of different legal tests that would be applied to the relationship to determine whether the company had sufficient arguments to support the chosen classification.
One factor considered is whether the service provider is economically independent from the company. This is related to a factor discussed in a subsequent post regarding whether the position and the work performed is integral to the business. “Integral” means “necessary to the completeness of the whole.” (Dictionary.com.) The federal Department of Labor (DOL) considers that a job is integral to the employer’s business if the individual is either (a) part of its production process or is (b) providing the service the business exists to deliver. (See, DOL Fact Sheet.) (See also, Independent Contractors Should Not Be Integral To Business.) Under the DOL’s analysis, if either of these exist situations exist, it is considered more likely that the individual is an employee and is not a contractor who is in business for him or herself.
A related factor considered is whether the service provider is economically dependent on the employer. If so, this indicates employee status. “Economically dependent” means that their income comes solely from this company; the contractor has no other clients. The DOL looks at these factors together, especially if it finds that an individual is integral to the business. In that case, there could be a presumption that the individual is economically dependent on that business.
A good rule of thumb to follow is to avoid classifying individuals as independent contractors when they are only providing services for that company. True contractors should be economically dependent with multiple clients. Here are some examples:
- An accounting firm should not hire an accountant to provide tax preparation services to its clients, even during the busy tax season, as an independent contractor, expecting that the accountant would be full-time for that company and not take on other assignments or jobs. That individual is most likely an employee—even if only a temporary one. A company who makes model airplanes, however, could hire an accountant to prepare its taxes and manage its cash flow as an independent contractor, especially if the accountant had other clients.
- A graphic design firm should not hire a designer as an independent contractor as a full-time part of the production process for the graphic design materials the firm was creating. A bank, however, could hire a graphic designer as an independent contractor to create a new brochure regarding the bank’s account choices, since that is an individual job and that designer is free to provide services to other companies so is not economically dependent on the bank.
- An architectural firm should not hire a full-time architect as a contractor since he or she would be assisting to deliver the product and services the company exists to deliver and would be economically dependent on the firm. A theatre, however, could hire an architect as an independent contractor when it sought to expand its production spaces and create an additional small theatre—even if the project took the architect’s full time during that period. That architect would expect to take on other projects once this was completed, demonstrating she was not economically dependent on the theatre.
Identifying how an individual is not economically dependent on a business is only one of the many arguments a company would need to make to defend its determination to classify an individual as an independent contractor.
Some states impose serious penalties and fines for getting it wrong. Misclassified service providers can sue for unpaid overtime wages and lacking benefits. For these reasons, it behooves employers to get it right.
Contact employment counsel familiar with the applicable laws in your business location to get assistance with this classification, or to obtain appropriate legal counsel if the DOL should come knocking because it believes your business got it wrong.