Independent Contractor Misclassification

An employer is not allowed to treat an employee as independent contractor for any reason, even if the employee agrees.

• Receiving a 1099 does not make you an independent contractor.

• Signing an independent contractor agreement does not make you an independent contractor.

• Working offsite or having flexibility in working hours does not make you an independent contractor.

• “Common industry practice” does not make you an independent contractor.

• Having an employee identification number (EIN) or paperwork stating that you are performing services as an LLC or for another business entity does not make you an independent contractor.

The reality of the working relationship is more important than the name given to the relationship in an agreement. To determine whether a worker is an employee or an independent contractor, courts look to the degree of control exercised by the employer, including three categories of “control and independence” rules:

• Behavioral. Does the company control, or have the right to control, what the person does and how the person does his or her job?

• Financial. Are the business aspects of the worker’s job controlled by the payor? How is the individual paid? Are expenses reimbursed? Who provides tools, supplies, vehicles, etc.?

• Type of Relationship. Will the relationship continue? Is the work performed a key aspect of the employer’s business?

The following factors are generally considered when determining whether a worker is an employee as opposed to an independent contractor:

• The employer’s level of control over the worker. This factor focuses on who sets compensation and hours, who determines how the work is performed, and whether the worker is free to work for others and hire helpers. This is a complex analysis that requires careful review, because the employer may have little control in certain situations involving both employees and independent contractors. In those instances, courts will look to who has meaningful, substantial control over various aspects of the working relationship. Thus, a worker can be found to be an employee even if the employer exercises less day-to-day control over the worker. Note that this factor does not hold any greater weight than the other factors.

• Whether the work is an integral part of the employer’s business. If a worker’s work is integral to the employer’s business, he or she is more likely to be economically dependent on the employer and less likely to be in business for himself or herself. Work is probably integral to the employer’s business if it is a part of its production process or is a service that the employer is in business to provide.

• Whether the worker has a managerial role. This factor focuses on whether the worker has a managerial role, for example, of hiring and supervision of workers, whether the workers managerial skill affects his or her opportunity to advance in the company.

• The relative investments in facilities and equipment by the worker and the employer. To be classified as an independent contractor, the worker must make some investment compared to the employer’s investment (and bear some risk for a loss). That may include investment in tools and equipment, so long as a worker’s investment compares favorably enough to the employer’s that they appear to be sharing risk of loss.

• The worker’s independence and initiative. Both employees and independent contractors may be skilled workers. Courts focus on whether the worker’s skills demonstrate that he or she exercises independent business judgment, and whether he or she has personally invested in training, education or development of skills. The fact that a worker is in open market competition with others would also suggest independent contractor status.

• Whether the employer/worker relationship is permanent. A permanent relationship with the employer suggests that the worker is an employee. However, the lack of permanence does not necessarily mean independent contractor status, because the impermanent relationship may be due to industry-specific factors, or the fact that an employer uses staffing agencies.