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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.