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The Increasing Importance of Independent Contractors in the Workforce

Corporate & Business Law

10 minute read

To compete in an ever-changing economy, companies are seeking flexible workforce structures that allow for rapid adjustments without the negative effects associated with downsizing, upsizing and other workforce shifts. Many companies are turning to independent contractors to obtain this flexibility.

Using independent contractors also brings other benefits. In general, with regard to independent contractors, companies are neither subject to anti-discrimination and sexual harassment laws nor responsible for payment of employment taxes, workers' compensation and overtime. Additionally, companies do not have the same level of exposure for the acts of independent contractors as they do for their own employees.

Despite strong market pressures to increase reliance on independent contractors, there are countervailing governmental objectives to classify workers as employees rather than as independent contractors. In particular, the government is concerned with preserving its tax base-a goal that may be hampered by independent contractors (who are not covered by workers' compensation and unemployment benefits) going on the public rolls.

There are also concerns that unscrupulous employers will seek to take advantage of their employees by classifying them as independent contractors to avoid payment of taxes, workers' compensation and overtime. As such, there are very limited circumstances (or exceptions) in which a person can be treated as an independent contractor.

When is a worker classified as an independent contractor?

There are no set rules as to when a person is classifiable as an independent contractor. Courts generally focus on the degree to which a worker is subject to the direction and supervision of his or her company. In doing its analysis, a court will start from the presumption that the worker is an employee. The court then considers the following factors to determine if the worker can be classified as an independent contractor: the extent of control the company exerts over the worker; whether the worker is engaged in a distinct occupation or business; the skill required by the worker; the length of time for which the company employs the worker; the method of payment, whether by time or by the job;� whether the work is part of the regular business of the company; whether the company provides the worker's only source of compensation; the company's power to fire the worker; the company's ability to set rates and method of payment; whether the company maintains employment records; whether the company pays the worker benefits; whether the work being performed is usually done under the direction of the company or by a specialist without supervision; whether the custom and practice of the industry is to treat the worker as an independent contractor

The worker may be classified as an independent contractor if he or she is a) responsible for his or her performance by determining the means and manner in which the work is to be performed, and b) is not subject to the direction and control as to every detail of the work.

Are certain workers automatically deemed independent contractors?

Yes, but there are only a few types of workers that fall within this category. Each state has different rules, but these workers generally include the following: masters and seamen on vessels engaged in interstate or foreign commerce; professional athletes; salespeople affiliated with a real estate broker paid on commission; salespeople who are direct sellers of consumer products on buy-sell or deposit-commission basis other than in a retail establishment; taxicab drivers.

Certain legislatures have also carved out an exception for domestic servants with regard to discrimination claims whereby domestic servants are treated as if they are independent contractors.

Does retaining a temporary worker through an employment or staffing agency ensure the worker will be classified as an independent contractor?

Not always. The courts and governmental agencies will apply the factors discussed above to determine the level of control the company exerts over the worker. If the agency is only handling the paperwork for the company, then it is likely a court will find the worker is an employee of the company. If the agency handles the hiring, firing, payment, benefits, supervision and direction of the worker, then the agency is likely to be found to be the employer.

However, there are times when the courts have found both the agency and the company were liable for payment of overtime and taxes of the workers because they were misclassified as independent contractors. This is a large gray area the courts are seeking to resolve on a case-by-case basis.

Does classifying a worker as an independent contractor protect the company from the damages and injuries the worker causes to others?

Not necessarily. The general rule is that the employer of an independent contractor is not liable for the harm caused to another by the tortuous act or omission of an independent contractor or his or her servants.

There are, however, several significant exceptions to this rule: (1) a company may be found liable for the acts of its independent contractor where the nature and circumstances of the work to be performed are such that injury to others will probably result unless precautions are taken; (2) a company negligently selects an independent contractor; (3) a company negligently issues orders to the contractor; (4) a company fails to inspect the work of the contractor; (5) a company fails to exercise the proper controls over the contractor; (6) a company knows or has reason to know the contractor's acts are likely to involve a trespass or a nuisance; and (7) the contractor is found to be the agent of the company.

What steps may be taken to ensure a worker is an independent contractor?

There is no set formula to ensure a governmental agency or the courts will classify a worker as an independent contractor. The following are steps a company can take to position itself to successfully argue it properly classified its workers as independent contractors: Enter into a contract with the worker for a specific job and duration; Allow the worker to maintain other employment; Do not provide benefits; Ensure the worker pays his or her taxes; Only characterize those workers with specialized skill sets as independent contractors; Limit the supervision and restrictions over the worker; Do not maintain an employee file on the worker; Retain a staffing company to provide the worker; and Consult a lawyer.

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