How to Avoid Misclassifying Independent Contractors

I just finished preparing an upcoming presentation for the National Business Institute on independent contractors.  To determine whether a worker is an independent contractor, the courts and agencies apply a number of complex tests that focus on different factors.  The consequences of misclassifying an employee as an indpendent contractor can be significant including back taxes, back pay, fines, penalties, interest, attorneys’ fees, and liquidated damages.

I like Kathleen Barrow’s take on the issue in an article she wrote for the Society for Human Resource Management.  She gave an easy-to-apply example that incorporates many of the complex factors that the courts and agencies look at.  She calls it the “Joe the Plumber” test:

A plumber is someone a company calls to fix a unique problem. Assuming the company is not in the plumbing business, the duties the plumber performs are neither central nor critical to the company’s ability to make a profit. The company calls the plumber only when events trigger a need for services. The plumber has a number of clients, the company being one of many that the plumber assists in a similar manner. The plumber advertises his or her services to third parties, drives his or her own truck, and brings his or her own tools to the workplace to perform the required job. The plumber would go out of business, not the company, if the plumber is not good at what he or she does.

The more your situation is like that of “Joe the Plumber” example, the more likely it is that you have a contractor relationship rather than an employer-employee relationship.

Here is my list of Best Practices to consider when structuring a relationship so that it is more likely to be deemed a contractor relationship rather than an employer-employee relationship:

  • Avoid having the independent contractors perform work vital to the company’s core business.
  • Avoid having independent contractors perform the same work as employees.
  • Have a written agreement.
  • Require some type of “cause” for terminating the agreement rather than “at will” agreements.
  • Require the independent contractor to have a business license and any professional licenses and to provide you with a copy.
  • Obtain copies of insurance certificates.
  • Obtain a copy of a signed W-9 form.
  • Create a structure under which the independent contractor has a substantial risk of loss and profit.
  • Require the independent contractor to provide his or her own tools and equipment.
  • Require the independent contractor to pay his or her own expenses.
  • Require the independent contractor to perform services for others as a practical matter and not just as a matter of contract.
  • Avoid training the independent contractor.
  • Avoid directing the independent contractor how to perform the work.
  • Avoid requiring the independent contractor to have constant contact with the company, to regularly come to the company’s location, or to attend meetings.
  • Avoid requiring regular status updates from the independent contractor.
  • Permit the independent contractor to reject work.
  • Do not require the independent contractor to personally perform the work.
  • Require the independent contractor to be responsible for damages caused by its actions.
  • Pay the independent contractors by an invoice with the independent contractor’s federal tax identification number.
  • Pay the independent contractor by the project, a fixed fee, achievement of goals, or some other method other than by the hour.
  • Require the independent contractor to obtain workers’ compensation insurance and provide evidence of the coverage.
  • Use language in communications that is consistent with a contractor relationship and not an employment relationship.
  • Contract for project or other discrete period rather than for regular or continuous services.
  • Allow the independent contractor to set hours of work.
  • Manage for results and avoid giving instructions about how to achieve the result.
  • Keep independent contractor files with other vendor files and away from employee files.
  • Collect evidence indicating independent contractor status such as business cards, yellow page ads, and other marketing material.
  • Do not have independent contractor complete employee application.
  • Do not provide the independent contractor with an employee handbook.
  • Do not provide the independent contractor with employee benefits.

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