A common business problem I come across are companies which hire workers as independent contractors and not as employees. Many of these companies have no signed written independent contractor agreement stipulating that the worker is an independent contractor and not an employee. Even with a signed written independent contractor agreement in place, despite what the agreement says, unless a number of factors are satisfied the worker may nevertheless be classified as an employee and not as an independent contractor.
These factors vary according to state and federal laws, but the IRS has a list of factors here as a starting place. The IRS factors are:
1. Behaviorial Control (are instructions given to the worker as to when, where, and how to do the work; what tools or equipment to use; what other workers can assist with the work; where to purchase supplies; and the order or sequence of the work). The more behavorial instructions which are given, the greater likelihood that the worker is an employee;
2. Financial Control (does the worker have his or her own significant investment in the equipment used to perform the job; is there an opportunity for the worker to lose money on the job; is the worker free to also work for other companies; and is the method of payment akin to an employee or an independent contractor); and
3. Type of Relationship (is there a written agreement; are there employee benefits; is the relationship for a particular task or is it permanent; are the services provided a key activity of the business).
The determination of whether a person is an independent contractor or employee is fact sensitive. If a company or a worker is uncertain if a worker is an independent contractor or employee based on the IRS factors, that person can complete and submit IRS Form SS-8, and the IRS at no charge will make the determination for purposes of federal employment taxes and income tax withholding.
Georgia’s Employment Security Law provides that services performed by an individual for wages are deemed to be employment (and not an independent contractor arrangement) unless and until it is shown that (1)(A) such individual has been and will continue to be free from control or direction over the performance of such services, both under the individual’s contract of service and in fact; and (B) such individual is customarily engaged in an independently established trade, occupation, profession or business; or (2) such individual and the services performed for wages are the subject of an SS-8 determination by the IRS, which decided against employee status. O.C.G.A. Sec. 33-8-35(f).
Whether a worker is an independent contractor or is in fact an employee (even with a written independent contractor agreement in place) has significant consequences to the company as to liability, workers’ compensation, unemployment compensation, withholding requirements, FICA and Medicare, health insurance and other benefits, and the possible application of a host of federal and state laws. From the company’s perspective, sometimes the worst place to be is to for the issue to be unclear and in a gray area. This can result in litigated claims against the company by the worker, possible liability to third parties (for torts and wrongs committed by the worker while working for the company), company-wide audits by state and federal agencies, and many other issues.
Companies should also consider that independent contractors by the independent nature of their duty may often set their own hours and work for other companies, including competitors. Even if a worker can properly be classified as an independent contractor, if the worker is hired as an employee with the company, then the employee will owe a duty of loyalty and care to the company, and the company can exert greater restrictions on the employee, such as restricting the employee (in a written employment agreement) from working for a competitor while also working for the company.
Companies should consult with their accountant or attorney as to whether a worker is in fact an independent contractor or employee. If a worker may be properly classified as an independent contractor, a written independent contractor agreement should be drafted, prepared and signed. Even if a worker may be classified as an independent contractor, it sometimes may be better practice nevertheless to classify the worker as an employee so the company may exert greater control over the worker.