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Legal Issues
Mar 1, 2015

Employee Or Independent Contractor – A Critical Distinction

Sponsored Content provided by Benton Toups - Attorney, Cranfill Sumner & Hartzog LLP

Dependable Dan works for Courteous Construction Company (CCC) and has for years, off and on, depending on workload. He shows up for work every day at 7 a.m. and works until 5 p.m., just like his boss asks. He carries some of his own tools, but CCC supplies him with the rest. His boss doesn’t hover over his shoulder all day, but at the end of each day, he inspects Dan’s work to make sure it is up to standards.
Is Dan an employee, or is he an independent contractor? The distinction has huge implications.
Employee versus Independent Contractor: How to Tell the Difference
Unfortunately, there is no easy, bright-line rule for determining who is an employee and who is an independent contractor. I frequently hear business owners say things like, “I pay him on a 1099, so he’s an independent contractor.” This is a common misconception. While it is true that independent contractors are properly paid on a 1099 and not a W-2, payment on a 1099 does not make the person in question an independent contractor. It is simply one effect of the classification of the individual as an independent contractor.
Courts and various government agencies apply different tests to draw the distinction, depending on the purpose for the classification; however, the more of the below criteria an individual meets, the more likely he is properly considered an independent contractor:

(a) engaged in an independent business, calling or occupation;
(b) exercises independent use of his special skill, knowledge, or training in the execution of the work;
(c) does a specified piece of work at a fixed price or for a lump sum or upon a quantitative basis;
(d) not subject to discharge because he adopts one method of doing the work rather than another;
(e) not in the regular employ of the other contracting party;
(f) free to use such assistants as he may think proper;
(g) has full control over such assistants; and
(h) selects his own time.              
No one, single factor is determinative. Ultimately, it boils down to control. The more control the principal exercises over the work of an individual, the more likely that individual is an employee. The less control the principal exercises over the work of an individual, the more likely that individual is an independent contractor.
An Important Distinction: Implications of this Classification
The independent contractor versus employee distinction has wide-ranging implications for businesses. Below are some of the most important:

  • Taxes – This is a big one. Employees are subject to payroll withholdings and issued a W-2. Independent contractors are subject to no withholdings and issued a 1099.
  • Workers’ Compensation – Employers with at least three employees must carry workers’ compensation insurance coverage. Employees injured on the job are entitled to workers’ compensation benefits.
  • Employment discrimination laws – Most kick in only after a certain number of employees work for the employer
  • Vicarious liability – Employers are liable for damage caused by their employees acting in the course and scope of employment.
  • Wage/hour laws – Recordkeeping, minimum wage, and overtime regulations apply to employees but not independent contractors.
There is certainly temptation to classify workers as independent contractors rather than employees. It’s easier, and it’s cheaper, at least in the short-term. However, misclassification of employees as independent contractors can quickly become an expensive mistake in the event of an IRS audit or an uninsured workplace accident. When the circumstances are such that the distinction between independent contractor and employee is unclear, it becomes a matter of risk tolerance for the business owner. Classification of workers as independent contractors is always cheaper (again, at least in the short term), but classification of workers as employees is always safer. It’s often a tough call.
The Takeaway
The employee versus independent contractor distinction is a critical one for business owners to understand and properly implement. Courts and government agencies don’t care whether you call your workers employees or independent contractors. They are what they are, based upon the criteria discussed above. Failure to properly classify them carries significant risk.
This content has been prepared for general information purposes only. This information is not intended to provide specific legal advice. Legal advice is dependent upon the specific circumstances of each situation. The information provided cannot replace the advice of competent legal counsel by a licensed attorney in your state.

Benton L. Toups is a partner at Cranfill Sumner & Hartzog LLP and serves as vice-chair of the Employment Law Practice Group. His practice concentrates on representing businesses in all aspects of labor and employment law. A firm believer in the adage that “an ounce of prevention is worth a pound of cure,” Toups counsels employers on day-to-day issues and assists them in developing and implementing policies to avoid employment litigation. To contact Toups, call (910) 777-6011 or email him at [email protected].

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