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What You Should Know About an Independent Contractor v. an Employee

What You Should Know About an Independent Contractor v. an Employee

What You Should Know About an Independent Contractor v. an Employee 1920 1080 Deborah Ann Nilson

You start a company or your business is doing well and you want to expand; therefore, you need to hire more workers. You may have heard something about the difference between an independent contractor and an employee but the choice is pretty obvious no? Independent contractors are more flexible, cheaper, and you get to avoid the hassles of wage and hour laws. In addition, your worker has no problem with an independent contractor agreement, so why would you classify him or her as an employee? The answer is simple: the classification of this worker must be in compliance with the law; it is not up to you and the worker to choose it; and it is important to get this distinction right.

The most important IRS rule and common law doctrine to keep in mind when defining your worker is 1) the amount of control your business has over the individual-the more control your company has over the worker and how, where, and when the work is performed, the more likely he or she will be considered an employee and 2) companies, however small, are in fact being audited. So, while it may be tempting to circumvent laws associated with hiring employees (especially for foreign companies hiring independent contractors in the U.S. in a matter of minutes thanks to the internet), the risk is real and increasing.

What is the difference between an independent contractor and an employee?

In determining the status of a worker, the IRS uses eleven main tests/factors organized into three main groups: behavioral control, financial control, and the type of relationship of the parties (source: IRS Publication 15-A, 2010 Edition, page 6; available for downloading from http://www.irs.gov/pub/irs-pdf/p15a.pdf).1 Each factor is designed to evaluate who controls the work and how it is performed. No factor is determinative of an individual’s status but rather, looking at the totality of those factors and circumstances of each worker, one can make a more accurate classification.

Behavioral control

1. Instructions the business gives the worker. The key consideration is whether the business has retained the right to control the details of a worker’s performance.
2. Extent of any training the business gives the worker.

Financial control

3. The extent to which the worker has unreimbursed business expenses.
4. The extent of the worker’s investment. If the worker supplies his or her own equipment, materials and tools.
5. The extent to which the worker makes his or her services available to the relevant market.
6. Method of compensation: whether a person is on an employer’s payroll and receives a steady paycheck.
7. The extent to which the worker can realize a profit or loss.

Type of relationship

8. Written contracts describing the relationship the parties intended to create.
9. Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay.
10. The permanency of the relationship. If the worker can be discharged at any time and can choose whether or not to come to work without fear of losing employment.
11. The extent to which services performed by the worker are a key aspect of the regular business of the company.

Why the IRS and the Department of Labor care and what’s the risk?

When a worker is an employee, employers must pay state and federal unemployment tax, social security tax and workers compensation/disability premiums. When a worker is an independent contractor, the hiring party is not required to make any of these payments. For this reason, the IRS and the Department of Labor are getting more sensitive about misclassification and as a result more companies are starting to get audited regardless of their size. It is important that business owners understand that violations for misclassification can be steep. In some instances, there can be criminal charges for willful violations. Ultimately, if the IRS deems an independent contractor to be an employee, the punishment will likely require payment of a variety of fees and taxes including: FICA, federal unemployment tax, retroactive benefits, social security, and not to mention legal fees.

What about my intellectual property if the worker is an independent contractor?

At the IP level, this distinction is also important. If the person is an employee, his work, in the context of his employment, is regarded as “work made for hire.” This is an exception to the general rule that the person who creates a work is legally recognized as the author of this work.
However, many businesses which misclassify their workers (and have independent contractor agreements with workers who should be employees) omit to specify in such agreements that the work created in the name of the business and pursuant to the terms of an independent contractor
agreement is a “work for hire.” Failure to include this will result in any work created such as possibly pamphlets, trademarks, and customers lists to be the property of the worker, not the business.

The Bottom line

Know the status of your worker. An independent contractor is his or her own boss while an employee is much less independent and works within the parameters set by your business. Misclassification is a serious risk for a business of any size. Accurately classifying your worker will save you time and money in the long run.

Recent Developments in New York State and City Employment Law

Recent Developments in New York State and City Employment Law

Recent Developments in New York State and City Employment Law 1920 1080 Deborah Ann Nilson

In NYC the Earned Sick Time Act is scheduled to go into effect on April 1, 2014, or some time thereafter contingent upon economic indicators. For the first 18 months after the law becomes effective it will apply to private employers with 20 or more employees. Thereafter, it will apply to employers with 15 or more employees. All persons performing work for compensation, whether on a full-time, part-time, or temporary basis, are counted when determining coverage. Employers with employees less than the minimum number requiring paid leave must provide the same number of days of unpaid sick leave.

Under the law, any person employed within NYC for more than 80 hours in a calendar year is entitled to the sick leave benefits. Upon the date of hire, covered employees are entitled to begin accruing sick leave at a rate of one hour for every 30 hours worked, with a maximum of five days (40 hours) of sick leave per calendar year. However, employers are not obligated to allow use of the sick leave until after 120 days following the date of hire. Employers must carry-over or alternatively, if paid sick leave, pay an employee for any unused sick leave at the end of the calendar year. However, employers may limit the amount of sick leave that can be accrued in a calendar year to five days—meaning an employee could carry-over up to five days but could not earn more sick leave in the preceding calendar year until some sick leave has been taken.

The law allows employees to take sick leave for “the employee’s mental or physical illness, injury or health condition.” Read broadly, the law may, theoretically, include an employee’s request for a “mental health day.” Employees also may take sick leave for themselves and their eligible family members, among other reasons, who: (1) need a medical diagnosis; (2) require care or treatment of a mental or physical illness; (3) have an injury or health condition; or (4) need preventative medical care.

Employers who already have or who implement a leave policy—including time off, vacation, sick, and/or personal days—that provides for leave in an amount and manner sufficient to meet the requirements of the law and allow the leave to be used for the purposes and under the same conditions as required by the law, are not required to provide additional sick leave. This is true whether or not the employee uses such leave for the employee’s own illness or that of family members.

However, all employers must provide a notice of entitlement to leave and describe the amount and terms of sick leave, including any right to unpaid leave, to all new hires. The notice must also inform employees that the law expressly prohibits retaliation for requesting or using sick leave, and that they have a right to file a complaint with the Department of Consumer Affairs. The employer must provide notice of the sick leave benefits in English and the employee’s primary language, if the employee’s primary language is Chinese, Korean, Russian, Polish, Haitian-Creole, or Spanish. Notice translations are available from the Department of Labor.

While the law does not include any requirement that employers notify current employees of the sick leave entitlement or to post a notice in areas accessible to employees, it would be prudent to do so.

In addition to the written notice requirement for new employees, the law also requires employers to retain records for a period of two years that document the number of hours worked by each employee and the amount of sick leave accrued and taken by each employee. If an employer fails to maintain or retain these records, a presumption arises that the employer has violated the law.

The sole recourse for an employee claiming to be aggrieved by a violation of the law is to file a complaint with the Department of Consumer Affairs. Initially, complaints will be addressed through mediation. If mediation is unsuccessful, and the Department determines that a violation occurred then an adjudicatory hearing before an administrative tribunal will be commenced. Violations will result in a civil penalty payable to New York City not to exceed $500 for the first violation; subsequent violations could subject employers to penalties of up to $1,000 per occurrence. In addition to civil penalties, employees may be entitled to damages from a minimum of $250 to well in excess of $2,500 depending on the circumstances.

Reasonable Accommodation for Pregnancy and Childbirth (NYC Law)

Effective January 30, 2014, NYC employers with four or more employees (including individuals classified as independent contractors) must provide reasonable accommodation to the needs of an employee for her pregnancy, childbirth, or related medical condition. However, an employer may defend against a claim under this law if the employee could not, with reasonable accommodation, satisfy the essential requisites of the job. The reasonable accommodation obligation arises when an employer knew or should have known about an employee’s pregnancy, childbirth, or related medical condition.

The law states that employers “may” be required to implement accommodations including, but not limited to, “bathroom breaks, leave for a period of disability arising from childbirth, breaks to facilitate increased water intake, periodic rest for those who stand for long periods of time, and assistance with manual labor.”

Covered pregnant or childbearing workers in New York City denied reasonable accommodations may sue and may recover from their employers, among other remedies, non-capped compensatory damages, punitive damages, and at the court’s discretion, costs and reasonable attorney’s fees.

The law requires employers to provide written notice, in a form and manner to be determined by the City Commission on Human Rights. (see http://www.nyc.gov/html/cchr/html/publications/pregnancy-infocard.shtml ), of the right of pregnant or childbearing workers to receive, from their employers, reasonable accommodations. Employers must provide such notice (i) to new workers at the commencement of employment and, (ii) by May 30, 2014, to existing workers. Such notice may also be conspicuously posted at an employer’s place of business in an area accessible to employees.

Work Rules for Models under Age 18 (New York State Law)

New York State legislation protecting minor models, including runway and print models, as child performers has gone into effect as of November 22, 2013.

Requirements of the law could include multiple forms of paperwork to register the employment of underage models. It will be necessary to carefully monitor the hours of minor models to comply with varying restrictions based on the model’s exact age and whether or not school is in session, such as not working after 10 PM on a school night and not working more than 28 hours in one week while school is in session (see http://labor.ny.gov/workerprotection/laborstandards/workprot/lschlhrs.shtm). Furthermore, in some cases, employers would also be required to provide tutors, trust accounts, and chaperones when employing minor models. Many commentators believe the best way to avoid additional fees and expenses, burdensome administrative obligations, and potential penalties is to only use models age 18 and older.

Employers who violate the law may be assessed civil penalties of up to $3,000 per violation.

Disclaimer

No Legal Advice or Attorney-Client Relationship

The information and materials available in this article are for informational purposes only and are not intended to and do not constitute legal advice, a solicitation for the formation of an attorney-client relationship, or the creation of an attorney-client relationship. The information provided may not apply to your particular facts or circumstances; therefore, you should seek legal counsel prior to relying on any information that may be found in this article. Furthermore, information provided in the article may not reflect the most recent and/or all developments in the law.

The Nilson Law Group, PLLC