Follow Benton Linkedin Twitter
Email Benton Email
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].

Wbj insights revised 0510
Ico insights

INSIGHTS

SPONSORS' CONTENT
Dave sweyer 300 x 300

Security Deposit Tips For Rental Property Owners & Tenants

Dave Sweyer - Sweyer Property Management
Michaelhiggins 41019104338

You’ve Lost A Loved One - What Now?

Michael Higgins - Dignity Memorial
Carolinemontgomery4

Paycheck Protection Forgiveness Just Got A Lot Easier

Caroline Montgomery - Adam Shay CPA, PLLC

Trending News

Fintech Company NCino Boosts Offering, Sets Valuation At More Than $1.9 Billion

Jenny Callison - Jul 7, 2020

From Car Dealers To Restaurants: Local Businesses Receive PPP Loans

Johanna Cano - Jul 7, 2020

Mortgage Firm Relocating To Barclay Commons

Cece Nunn - Jul 6, 2020

Hospital Trustees Back Novant For Negotiations; Outline Possible Spending Plan

Vicky Janowski - Jul 7, 2020

With Novant Recommendation, Here's What Happens Next In NHRMC Talks

Vicky Janowski - Jul 6, 2020

In The Current Issue

The Financing Issues Driving NHRMC Talk

While stakeholders and the public in New Hanover County may differ on the best path toward a sustainable future for New Hanover Regional Med...


New Eateries Still Open Despite Virus

While some restaurants have gone out of business and others are still temporarily closed, others are expanding....


NHRMC Talks Include Focus On Education

Graduate medical education has been one of several issues hashed out as part of the re­cent negotiations over New Hanover Regional Medical C...

Book On Business

The 2020 WilmingtonBiz: Book on Business is an annual publication showcasing the Wilmington region as a center of business.

Order Your Copy Today!


Galleries

Videos

2020 Leadership Accelerator: Virtual Workshops for Real Leaders
2019 Health Care Heroes
August 26, 2019 Power Breakfast: A Healthy Sale?
2019 WilmingtonBiz Expo Keynote Lunch - CEO, nCino, Pierre Naude`