Employee or independent contractor? – Oswego County Business Magazine
The differences between the two statuses are not always easy to determine
By Steven E. Abraham
“Generally speaking, it is much more beneficial for an organization to be able to treat its workers as independent contractors. However, it is not always clear in which category a worker belongs.
A the business frequently uses the services of individuals to work for the business. An interesting legal question is how these people should be classified.
Usually, they are considered employees. But it is also possible that they are considered independent contractors. The differences between the two statuses are important, but it is not always easy to determine.
Employees are covered by a plethora of federal and state employment laws, such as the Fair Labor Standards Act, Title VII of the Civil Rights Act of 1964, the New State Human Rights Act York, etc. Independent contractors are not.
When employees are hired, the organization must complete an I-9 form, certifying the employee’s eligibility to work in the United States. This is not required of independent contractors.
When an employee is hired, the employee fills out a W-4 form for tax purposes. Independent contractors complete a W-9 form.
At the end of the year, the organization must provide employees with a W-2 form listing the salaries paid to the employee during the year. Independent contractors, on the other hand, receive a Form 1099 if they are paid more than $ 600 in a calendar year.
Organizations must notify the Federal Unemployment Insurance Agency of any employee; no such notice is made for independent contractors.
There are legal requirements regarding when employees should be paid. In New York State, employees must be paid weekly or bi-monthly, depending on the occupation. There are no such requirements for independent contractors.
In general, it is much more beneficial for an organization to be able to treat its workers as independent contractors. First, the potential legal liabilities to independent contractors are far less than the potential liabilities to employees. The organization benefits financially if it can also treat its workers as independent contractors because social security taxes do not have to be paid and unemployment insurance contributions do not have to be paid. In addition, workers’ compensation insurance does not need to be provided for independent contractors.
However, it is not always clear in which category a worker belongs.
How to make the difference
Since the differences between the two categories of workers are so great, it is crucial that the organization is able to classify them correctly. This is often difficult, however, because there are different tests that the courts will use to make this decision.
According to the New York State Department of Labor, an employer-employee relationship may exist if the organization:
• Choose when, where and how workers perform services
• Provides facilities, equipment, tools and supplies
• Directly supervises the services
• Defines working hours
• Requires exclusive services (An individual cannot work for competitors while working for you.)
• Fix the rate of remuneration
• Requires attendance at meetings or training sessions
• Request oral or written reports
• Reserves the right to review and approve the work product
• Evaluates job performance
• Requires prior authorization for absences
• Has the right to hire and fire
The Federal Ministry of Labor refers to the following factors that the courts have used in reaching their decision:
The extent to which the services rendered are an integral part of the principal’s business.
• The permanence of the relationship.
• The amount of the alleged contractor’s investment in plant and equipment.
• The nature and degree of control exercised by the principal.
• Opportunities for profit and loss of the alleged entrepreneur.
• The degree of initiative, judgment or forethought in free market competition with others required for the success of the claimed independent entrepreneur.
• The degree of organization and independent commercial operation.
It should be noted that when Donald Trump was president, the Department of Labor said the agency would use what was called the “economic realities test” to determine an individual’s status. This statute stipulated that two “essential factors” had to be used:
• The nature and degree of control of the worker over the work
• The possibility for the worker to realize profits or losses.
This rule was generally seen by most to greatly facilitate the classification of workers as independent contractors by organizations; however, it was never promulgated.
The rule was published by the Trump administration’s DOL on January 7 and was due to go into effect on March 8. It was, however, withdrawn without ever coming into force after President Biden was elected.
And the IRS basically uses what’s called the 20-factor test:
• Does the employer dictate when, where and how the worker will finish the job? If so, the worker could be classified as an employee.
• Is there a minimum number of hours of training required before the worker is allowed to start work? Does the employer provide the training? It suggests an employer-employee relationship.
• Is work strongly integrated into business operations? Is the success of the business highly dependent on the satisfactory completion of the work by the worker?
• Does the work have to be done by a certain person and no one else? CIs are generally free to outsource their work, while employees are expected to do the work themselves.
• Does the employee have control over the worker’s assistants? Does the employer dictate who the worker uses as an assistant or even pay for the assistant? It suggests an employer-employee relationship.
• Did the worker perform the same work and the same tasks for the same employer for an extended period?
• Does the employer dictate the hours or days the work is to be done? It’s possible.
• Does the employer require the worker to work a minimum number of hours equivalent to a full-time job? Since this would prohibit the IC from looking for work elsewhere, it would likely be considered an employer-employee relationship.
• Does the employer require the worker to perform the work at a certain physical location? Could the work be practically done elsewhere? It is the marking of a working relationship.
• Is the schedule of work to be done dictated by the employer? This indicates a more employer-employee level of control than employer-CI.
• Should the worker check with the employer for updates on the work performed? Are written or oral reports mandatory? If so, the worker can be an employee.
• How is the worker paid? Is there a particular payment schedule in place, such as hourly, weekly or monthly? CIs are usually paid in a lump sum after the job is completed
CIs generally bear their own travel and business expenses, while employees are generally entitled to some sort of compensation for business or travel expenses.
How do workers do the work? Are these tools and equipment provided by the company or are they supposed to provide their own tools and equipment to complete the job? Employees typically use company equipment, while CIs are expected to provide their own.
CIs generally do not invest in the facilities where they do their work. Does the worker invest in company premises? If so, it may be an employer rather than a CI.
CIs do not share profits or losses. Employees can participate in a profit-sharing plan.
Can the worker work elsewhere? Otherwise, they can be classified as employees.
Are the skills of the worker available for general hire to the public? Otherwise, it is more likely an employer-employee relationship.
Under what circumstances can the employer withdraw job offers? If there is a contract in place, it may or may not suggest an IC relationship with the employer.
Does the worker have the right to refuse work in progress? If so, it is more of an IC-employer relationship.
It’s also worth noting that the Biden administration prefers something known as the three-part ABC test.
This test has three essential elements. A person performing a service should be considered an employee and not an independent contractor, unless:
The individual is free of control and direction in the performance of the service, both under the contract for the performance of the service and in fact;
The service is rendered outside the ordinary course of the employer’s business; and
The individual is usually engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service rendered.
It should be noted that courts may apply a different set of criteria to determine the status of an individual worker. The tests just listed are those used by various state and federal agencies, but the courts are not bound by any of these tests. A court is free to use a different set of criteria.
Finally, it should be noted that it is also possible for an organization to establish a relationship with its workers in certain cases. For example, if the organization wants its workers to be considered independent contractors, the organization might be able to establish an employment relationship in such a way that workers are more likely to be considered independent contractors. , using the tests described above.
Steven e abraham is a professor at the SUNY Oswego School of Business. He received his BS from Cornell University, his JD from NYU Law School, and his PhD from the University of Wisconsin, Madison. He teaches courses related to labor law, employer-union relations and human resources management.