By Beau Ruff

An

individual or a business can engage (i.e., contract) with another as an

employee or an independent contractor. The business owner is usually better

served if he or she can categorize a worker as an independent contractor rather

than an employee.

In

fact, most business owners would probably prefer all independent contractors

rather than employees.

If

properly categorized as an independent contractor, the business owner need not

fear liability for the contractor or the contractor’s work. The business owner

need not pay employment taxes or withhold federal income taxes. The business

owner need not pay unemployment taxes or into the Labor and Industries

insurance funds.

But,

the decision to treat new or existing hires as employees or independent

contractors can have serious consequences for your business. And, the

misapplication of the classification (as either an independent contractor or

employee) can lead to liability for the business and the business owner. Though

the business owner may prefer the independent contractor relationship, the law

requires an analysis of the relationship and the precise application of the

status.

What

is an employee?An employee is an “agent employed by (an employer) to

perform service in his affairs whose physical conduct in the performance of the

service is controlled or is subject to the right to control by the (employer).” Kamla v. Space Needle Corporation, (2002). Employers are liable for the

harm caused by employees through the theory of respondeat superior, a

Latin phrase meaning loosely, “let the master answer for his servant.”

This

legal action allows an injured party to directly sue the business for all harm

caused by the employee as if the business itself caused the harm. Typical

employees include restaurant workers, flight attendants, paralegals, factory

workers and teachers. All employees receive income reported on the IRS form

W-2.

What

is an independent contractor? An independent contractor is a worker who

“contracts with another to do something for him but who is not controlled by

the other nor subject to the other’s right to control with respect to his

physical conduct in the performance of the undertaking.” The readily apparent

examples of an independent contactor include the plumber you call to fix your

sink, the lawn care provider that tends to your grass, and the driver you hire

to take you to the airport.

For

each example, the person hiring the independent contractor expects to rely upon

the skill and judgement of the contractor to complete the task. Further, the

hiring individual does not dictate many things about the engagement, like: how

the task will be performed, who will perform the task, the clothing or

appearance of the worker, the time it will take to perform the task, the tools

necessary for the task, etc.

More

precisely, the employer hiring the person inspects only the results of the work

and not the means whereby it is to be accomplished.As the hiring

individual has no control, the law provides that the hiring individual bears no

responsibility (read: liability) for any harm caused by the independent

contractor. For example, if I hire a lawn care service and the lawn care truck

causes an accident while getting materials for my lawn, I am not liable to the

third party that was injured. An independent contractor receives income

reported on the IRS form 1099.

The

question of status hinges on whether the hiring party has control. More

precisely, the question is whether the hiring party retains the “right to

direct the manner in which the work is performed, not simply whether there is

an actual exercise of control over the manner in which the work is performed.”

The IRS looks to evidence of the degree of control by looking into three

categories: behavioral (does the hiring person have the right to control the

manner in which the worker completes the job); financial (are the business

aspects of the job controlled by the hiring person); and the type of

relationship (written contracts, length of relationship, and benefits).

A

host of issues can beset a business owner that misclassifies the worker. On the

legal liability side, the employer would be liable for acts of the employee,

but if the employer treated the employee as an independent contractor, the

business owner may not have appropriate insurance coverage but still the full

liability. 

The

employer also may be held responsible for back taxes (for both federal

withholding and employment taxes that should have been paid). A business owner

may also run afoul of sick time claims and overtime claims when an independent

contractor is appropriately deemed to be an employee. An independent contractor

properly classified as an employee may not qualify for labor and industry

insurance and may then also hold the employer liable for the damages incurred.

And, on a practical level, the misapplication can create conflicting employment

expectations inherent in the separate expectations of an independent contractor

and employee.

Talk

to your accountant and attorney to ensure you are properly classifying your

employees.

Attorney Beau Ruff works for

Cornerstone Wealth Strategies, a full-service independent investment management

and financial planning firm in Kennewick.