The use of independent contractors instead of employees allows businesses to tailor their workforce to business's needs at a particular time. However, incorrectly classifying an employee as an independent contractor can have serious implications for an employer related to wage and hour issues, reimbursement of expenses, and possible tax implications. Therefore, it is important that if you choose to retain the services of an independent contractor, that you make sure the individual is properly treated as an independent contractor.
Unfortunately, there is no single determinative factor in distinguishing an employee from an independent contractor. Instead, one must examine the facts of the relationship and apply what has come to be known as the "economic realities" test. A significant factor is whether the employer retains the right to "control" the work of the individual, but the following factors must also be considered:
- Whether the person performing services is engaged in an occupation or business distinct from that of the principal.
- Whether or not the work is a part of the regular business of the principal.
- Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work.
- The alleged employee's investment in the equipment or material required by his task.
- The skill required in particular occupation.
- The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision.
- The alleged employee's opportunity for profit or loss depending on his managerial skill.
- The length of time for which the services are to be performed.
- The degree of permanence of the working relationship.
- The method of payment, whether by time or by the job.
- Whether or not the parties believe they are creating an employer-employee relationship.
These eleven factors cannot be applied mechanically, and most often, you will find that some of the factors suggest an independent contractor relationship and some suggest an employer-employee relationship. Is it often beneficial to have a labor and employment attorney assist you in analyzing whether a particular worker should be retained as an independent contractor or hired as an employee.