The Independent Contractor Myth–Tip of the Week

Blackwater Worldwide has been in the news for a long time now.  Hired by the U.S. Government to do various contracting work in Iraq, it’s been under investigation for all sorts of things.  Congress has just announced something else Blackwater is being investigated for: treating employees as independent contractors.

I don’t know what this investigation will show, but I know that Blackwater wouldn’t be alone in engaging in this activity.  Some employers do it innocently.  They just think you can choose to make a worker an employee or an independent contractor.  They particularly think that if the worker signs a document called “independent contractor agreement.”  Some employers know better, but since everyone else is doing it, what the heck.

What’s the big deal?  If a worker is an independent contractor, you don’t have to withhold federal and state income taxes, you don’t have to withhold social security and medicare, you don’t have to worry about normal employee benefits, you don’t have to pay premiums for unemployment compensation, etc.  Increasingly, the feds and state governments are going after employers who misclassify workers as independent contractors.  If you’ve messed up, you’ll owe taxes, penalties, fines, premiums, etc.  You may even owe the workers something, because they should have been treated as employees.

How do you know if a worker is an employee or an independent contractor?  The main question is who controls the work being done.  If you control it, the worker is an employee.  If the worker controls it, he/she is an independent contractor.  And how do you determine control?  The 20 factor test used by the Internal Revenue Service is still a good starting point for answering that question.  Click here, here, and here.

Here are some simple points to remember.  The fact that you have an “independent contractor agreement” with the worker isn’t determinative.  If a worker is doing what other employees do, he/she is likely to be an employee irrespective of an agreement that says otherwise.  If the worker performs work only for you, as opposed to performing work for multiple companies, he/she is likely to be an employee. 

A plumber is an independent contractor.  A house painter is an independent contractor.  An electrician is an independent contractor.  An IT worker who sits next to your other IT employees all day long doing what the other IT employees do is an employee.

You need to occasionally do an audit on this.  Determine how many independent contractors you have.  Determine what they’re doing.  Determine if they do work for other companies in addition to the work they’re doing for you.  Compare what they’re doing with what your employees are doing.  If you have a lot of workers classified as independent contractors, you need to take a close look at the situation.  If you don’t and if you’re audited or sued, you could be looking a big wad of money in fines and penalties, just for starters.

1. 

   melody says:

   January 15, 2009 at 11:00 pm

   I just signed an agreement/but, it said that I can’t work for any other business with similiar product. (sales) I want to keep my renewals and not give up my other ind. job. Can they inforce the agreement to only work with them? Also, it has a 3 year agreement not to work with a competetor once I leave – can they inforce that?
2. 

   John Phillips says:

   January 16, 2009 at 12:18 pm

   Melody,

   The answers depend, for the most part, on the state law for the state you’re in. So, you should check with a lawyer in your state.

   As a general rule, if you signed an employment agreement, the provisions in question are probably enforceable (although the three year non-compete may be questionable — one or two year non-competes are safer).

   If you signed an independent contractor agreement, the provisions are questionable, but again, the law in your state would have to be looked at. Even if you’re a true independent contractor, it’s possible that some states might permit a provision in the agreement that prevents you from working for a competitor.

   Sorry I can’t be more definitive.

   John
3. 

   Jeana says:

   February 5, 2009 at 5:43 pm

   John I have been working as a independant comntractor for a company out of Amsterdam doing various types of business development for the past 3 months for a flat fee plus commissions. The company now is saying that they do not wnat to pay me based on lack of results. It is unreasonalble to expect results in 3 months what recourse do I have? If the compnay wants to sever the relation fine however I still have fees due to me how can I collect?
4. 

   John Phillips says:

   February 5, 2009 at 6:38 pm

   You may have to file suit. If you have a written contract or, at least, something in writing, that will help. Take whatever you have to a lawyer and see if he/she will write a letter on your behalf. Sometimes, that works, but sometimes you have to follow through with a lawsuit. I’d get some legal advice, see what your options are, and then make a decision on how best to proceed.