Five More Signs Your Independent Contractor May Be Properly Classified:
The contractor has its own employees. Since contractors are in business for themselves, they should be free to hire their own employees. If they actually do, chalk up a few points.
The contractor pays its own expenses. One indicator of a legitimate independent contractor relationship is that the contractor, if a sound businessperson, will earn a profit but, if a poor businessperson, will incur a loss. The profit/loss determination is often a function of how well the contractor prices its services. If you reimburse a contractor for all of its expenses, the risk of loss is generally removed. Legitimate independent contractors should be bearing some risk.
The contractor works from its own office space. The flexibility to work wherever and whenever suggests proper classification as an independent contractor.
The contractor works using its own tools and equipment. That’s more evidence that the contractor is running its own business and has more opportunity to incur a net loss.
The contractor carries its own insurance. When a contractor carries the types of insurance typically carried by a business, the contractor is likely operating as a business. Look for General Commercial Liability and Workers Comp coverage.
Remember, the tests for determining Who Is My Employee? vary by law, and most test are balancing tests, so no single factor is likely to be determinative. Relationships with these five features, however, are more likely to have the scales tilted in favor of recognizing independent contractor status.
In March, we posted Five Signs Your Contractor May Be Misclassified (with Bob Seger lyrics!). Today we look at the other side of the same coin. While there is no sure fire, (Silver) bullet (Band) proof assurance that your contractor relationship will withstand a legal challenge, there are some facts that tend to strongly support legitimate independent contractor status.
Here are 5 signs your independent contractor may be properly classified.
The contractor has an LLC or Corporation. When the IRS or DOL performs an independent contractior misclassification audit, the first thing it is likely to ask for is a list of who received 1099s in the past year. Receipt by individuals suggest possible misclassification. Companies are less of a flag.
The contractor has other clients. The true hallmark of an independent contractor is that the person is in business for him/herself. Having other clients is a strong sign that the contractor is running a legitimate independent business.
The contractor advertises its services in the marketplace. This may take the form of having a web page, flyers, even Facebook ads. Anything that suggests that the contractor is running a business and seeking buyers of its services is strong evidence in support of legitimate independent contractor status.
Your relationship with the contractor is project-based or for a fixed term. Open-ended relationships resemble at-will employment. While a fixed-term relationship can still exist in employment, it’s better than indefinite. Best of all, though, is a project-based engagement. Retain the contractor for a particular project. When the project ends, the relationship ends. Period.
Remember, the tests for determining Who Is My Employee?vary by law, and most test are balancing tests, so no single factor is likely to be determinative. Relationships with these five features, however, are more likely to have the scales tilted in favor of recognizing independent contractor status.
Arbitration agreements can be an effective way to manage disputes with independent contractors. The Federal Arbitration Act (FAA) and Supreme Court decisions support arbitration as an efficient way to resolve disputes outside of the courtroom.
But what happens when an independent contractor with an arbitration agreement claims to have been misclassified as an employee? Can these disputes be forced into arbitration?
Usually yes, but this blog post by my colleague, John Lewis, highlights the limitations of arbitration agreements when applied to transportation workers. Although federal public policy — as articulated in the FAA — generally favors arbitration as a way to resolve disputes, Section 1 of the FAA lists a few situations where the FAA does not apply. One type of excluded dispute is over “contracts of employment” with transportation workers.
Are independent contractor agreements with owner-operator truckers “contracts of employment” with transportation workers? Continue reading →
Have you ever heard someone say, “The definition of insanity is doing the same thing over and over and expecting a different result“? That’s just wrong. No, it’s insanely wrong. (Irony! Actual definition, click here).
If you flip a coin 5 times and it comes up heads each time, is it insane to think it might come up tails next time?
If you play golf in a lightning storm five times and never get hit, is it insane to think you might get a nice electrical jolt next time?
If you root for the Browns to win a football game and they never do, is it insane to think they never will? [Note to self: Delete that. Bad example. It is true that they might never win a game. Shameful admission: I am a Browns fan.]
My consistent advice to companies that use independent contractors is to be proactive. Review your policies, practices, and documents now — before you get sued or audited. Many take this advice. Those who do not generally give two reasons:
We don’t want to spend the money now; and
We’ve always done it this way and have never been sued.
Among James Bond films, Rotten Tomatoes ranks Never Say Never Again 18th out of 26, with a mediocre 63% rating. (Bond movie quiz at the end of this post, for patient readers.)
It’s a cliche saying, I know, but my first reaction when asked this question was, “I’d never say never, but it’s hard to imagine a scenario where that would work.” (That was also my second reaction and my third. Let’s just say that’s my reaction.)
Let’s run this through the gauntlet. Remember, it’s not your choice whether an intern is an independent contractor or an employee. The law decides that for you, based on the nature of the relationship.
The great scholar Mick Jagger reminds his followers that you can’t always get what you want, but if you try sometimes well you might find you get what you need. This is good advice, not just for Mr. Jimmy (who did look pretty ill), but also for companies who use independent contractors.
In a true independent contractor relationship, the hiring entity knows what it needs. It needs results, but the details about how, when, and where to work toward those results are left to the contractor’s discretion. There is no oversight or supervision.
The more direction a company provides a contractor on how to perform the work, the more likely the contractor is misclassified and the relationship will be deemed employment. You might want to control these things, but if they are not necessary to get what you need, then you should try sometimes and you might find you can get what you need without exerting extra control over the contractor. Continue reading →