Independent Contractor or Employee: Why you need to get it right! (Part 1)
Part 1: Independent Contractor or Employee?
You might think determining whether a worker should be treated as an independent contractor or an employee is a fairly simple task. While that may be true for the obvious independent contractor, such as an established business that provides services to the public (think Jane’s Plumbing or Benito’s Electrical Contractors with their own employees, shops and vans), it’s much harder to determine when you’re hiring an individual worker.
Unfortunately, there is no simple test or checklist you can use to decide whether a worker is an independent contractor or an employee. Every situation must be analyzed on its unique facts, and even then it is often a difficult judgment call. This difficulty is compounded by the fact that the standards vary between different Oregon laws, as well as between state and federal law. For example, a worker who qualifies as an independent contractor for Oregon tax purposes may not qualify as an independent contractor under Oregon’s Workers’ Compensation Law.
In general terms, the key issue is whether the worker is “customarily engaged in an independently established business.” The agencies and courts weigh many factors, such as those listed here, to decide the answer, but no single factor is necessarily conclusive:
- Does the worker maintain his own business location separate from the hiring party’s work site?
- Does the worker bear the risk of loss relating to her own business, such as guaranteeing her work and fixing her mistakes at no additional cost, or performing work for a fixed price and eating the extra cost if the job takes longer or requires more supplies than anticipated?
- Has the worker made a significant investment is his business for such things as tools of his trade, a business vehicle, office equipment, office space, work space, insurance, permits and licenses or other investments typical of a real business?
- Does the worker provide her services to more than a single customer?
- Does the worker advertise his services or otherwise solicit business from the general public or within his industry?
- Does the worker file business tax returns?
- Does the worker have the authority to hire and fire employees that provide his business’ services?
- Does the worker decide when, where and how he will perform the services, with little or no direction from the business that hires him?
You may think you are safe if you and the worker agree to treat the worker as an independent contractor. The setup sounds great for both parties. You don’t have to worry about all the tax headaches and administrative obligations and costs that come with having an employee, such as payroll taxes, workers’ compensation insurance, tracking hours, providing benefits, etc. You get a bill from the worker and you pay it, nice and easy. The worker likes the arrangement, too, because there are no deductions from her compensation, she controls how to report her income and she likes the independence of not being an employee.
As a lawyer, when I question an employer’s decision to treat a worker as an independent contractor, I often hear, “This worker begged me to pay him as an independent contractor. It’s easier for me, too, so why not? As long as we’re both happy, what’s the difference? No one will know anyway.”
Well, the difference is that if the relationship sours and an administrative agency or court is called upon to review the arrangement, what you and the worker call your arrangement carries very little weight, if any at all. The agency or court will look right past what you call the relationship and decide for itself whether the worker is an employee or independent contractor.
Additionally, and most importantly, you and not the worker, bears the bulk of the financial liability for misclassifying an employee as an independent contractor, regardless of whether the worker was a willing participant. In Part 2 of this post, “The high VERY HIGH Cost of Misclassifying an Employee as an Independent Contractor,” you will learn about the financial storm that a mistaken classification can rain down on you.