Avoiding Pitfalls with 1099 Workers

Posted on March 15, 2011 in Employment Litigation

Perhaps the most common misconception in employment law is this: by paying someone as an independent contractor, an employer avoids liability under various federal and state laws.  For example, the overtime requirements of the Fair Labor Standards Act (FLSA) only apply to employer-employee relationships.  An independent contractor also cannot sue for discrimination (in most circumstances).  But whether a person is truly an independent contractor or an employee has little to do with how the business pays the person in the eyes of a court.  Instead, the court will evaluate the true relationship between the employer and worker by focusing on several key factors to determine the true role of the worker.

In this newsletter, we explain the distinctions between independent contractor and employee relationships and then highlight the decision points that every business should assess when determining if it can properly classify a worker as an independent contractor.

A true independent contractor provides a service to a business for a finite period of time using his own skills, knowledge, and tools.  Most often, the skill set is different than that of the company’s own workforce.  Hence, the company reaches outside of its workforce to obtain the services of an independent contractor, who performs the task or project without the need of company supervision.    The task or project is of short duration or, in some cases, seasonal work.  Generally, an independent contractor is left to perform the work on his own schedule and at his own pace within reasonable parameters.  Independent contractors are not dependent on any one company for their income, and instead have the opportunity to freelance their services.

In contrast, an employee is subject to the control and direction of the company in every aspect of the work relationship.  Employees are economically dependent on the company.  Work hours, schedule and pay are dictated by the company.  The employee also owes his employer certain duties (e.g., duty of loyalty and confidentiality) and may be barred from moonlighting for a competitor.

For further consideration, a business can determine whether a person is an employee or independent contractor by analyzing certain important elements.

A contractor’s work is distinct from that of the company’s regular employees. The work for which the contractor is retained should be different from the work performed by regular company employees.  An employer who has independent contractors and employees performing the same job functions raises a red flag.  This usually indicates that the employer is avoiding overtime, failing to withhold taxes, or denying other significant obligations.

Only highly skilled individuals should be considered as independent contractors.   An independent contractor must be capable of completing an appointed project without supervision or oversight.   If a person has a direct supervisor, then, by definition, that person is likely an employee. 

Contractors supply all equipment and tools.  The prospective contractor should not need any equipment or tools from the company.  In fact, the contractor should have made a significant investment in equipment to perform the job.

Contractors do not earn benefits.  Obviously, the company should not provide any form of benefits to an independent contractor.  For the same reason, an employer should not pay an independent contractor cash allocations for insurance or other perks (e.g., a car allowance).  This is often a dead giveaway that the person is an employee by law.

The company has limited control over the work. A company should not control the manner of an independent contractor’s work.  The company should set a deadline for a contractor to complete the project, but the work should be done on the days and times the contractor desires, with some reasonable limitations possibly imposed (e.g., reasonable business hours).

Any contractor relationship for an individual’s services that extends past 90 days should be reviewed.  As noted above, independent contractor relationships are of a finite, relatively short period of time.  Yet sometimes projects take on a life of their own and the contractor works too long to be considered independent.  Generally, employers should not allow an independent contractor relationship to extend past 6 months.  It is good practice, however, to review and reassess each independent contractor relationship after 90 days.

Be wary of the person who asks to be a contractor.  Typically, the worker who wants to be paid on a 1099 is attempting to take some improper advantage on his taxes.   Companies should reject an employee’s request to be treated as an independent contractor.

We hope you find this newsletter helpful, and as always, we appreciate its distribution to friends who might also find it beneficial.

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