Are My Workers Independent Contractors or Employees, and Does It Matter?

Introduction

If you are a business owner, the benefits of labeling a potential employee as an independent contractor are easily known, from reduced payroll taxes to not having to pay worker’s comp benefits and potentially, not having to pay retirement benefits or overtime wages.

It is easy to want to label your employee as an independent contractor.

Be careful! The Louisiana Workforce Commission provides the rules and regulations for employers in regard to hiring employees and independent contractors in Louisiana.  There is a presumption that a worker is an employee and not an independent contractor.  If a worker is deemed an employee, they need to be on payroll, receive a W-2, and be covered by workers compensation and unemployment insurance.  An additional factor not always considered is that employees who are acting in the course and scope of their employment can open their employer up to lawsuits due to their negligence.  On the other hand, independent contractors can be paid with a 1099, and their negligence can most often not be attributed to the employer via respondeat superior.

In the News

It is imperative that an employer knows and correctly classifies his workers as employees or independent contractors.  The U.S. Department of Labor recently showed how costly a misclassification can be.  Gomez Drywall Construction, Inc. was ordered to pay Louisiana based workers nearly $180,000.00 in back pay for breaking rules on overtime compensation because Gomez had misclassified the workers as independent contractors.

Employee Factors

The following factors indicate that the relationship is employment:

1. The individual’s services are performed on the business premises of the company.
2. The individual has no financial investment in an ongoing business related to the services he is performing.

3. The company provides supplies, materials and necessary tools, and equipment for the individual.

4. The company provides training to the individual in the performance of the services.
5. The company’s duties to third parties would require that the company maintain control over the individual’s performance of services.

6. The individual uses the company’s business name in the performance of the services.
7. The individual is required or expected to personally perform the services.
8. The individual is required to report on a periodic basis the services performed, the amount of time the individual performed the services, or other details as to the performance of services.

9. Effective operation of the company’s business requires that the individual be supervised or controlled in the performance of his service; there is need for supervision of the individual.

10. There is representation (explicitly or implicitly) by the company to customers or the general public that the individual is an employee of the company.

11. There is no written contract or agreement between the company and the individual.
12. The company can terminate the individual’s services at any time without liability for damages.

13. The individual does not have a separate business address or telephone number.
14. The individual is prohibited from competing with the company either during the time he is performing services for the company or for any period thereafter.

15. The service performed is of an unskilled nature.
16. The type of service performed by the individual is the only service, or a major part of the service, which the company provides.

17. The individual has no separate insurance coverage for liability in connection with the services performed.

18. The individual has no other similar relationships with companies for which he performs similar services.

19. The individual is paid on a piece-rate or hourly basis rather than for a short-term project or job.

20. The arrangement is for ongoing, continuous services rather than for a short-term project or job.

21. The individual is established to the extent that he is financially dependent on the company, and cannot survive economically if he ceases to provide services for the company.

22. The individual is required or encouraged to keep regular hours or to perform services only during the company’s regular hours.

Independent Contractor Factors

            The following factors indicate that the relationship is one involving an independent contractor:

1. The individual has his own place of business separate from that of the company.
2. The individual provides his own equipment, supplies, and facilities.
3. The individual pays for his own expenses for travel and entertainment, licensing, and occupational permits.

4. The individual has other similar arrangements for the performance of services with other companies.

5. The individual receives payment by lump sum or contract rate rather than by an hourly or piecework basis.

6. The individual holds himself out to the public as available to perform similar services for others and does in fact perform such services for others.

7. The services are of a professional or technical nature, the details of which are outside the usual course of business and best left to the discretion of the individual.

8. The arrangement between the individual and the company is in the form of a written agreement which has a specific contract amount and a definite term.

9. The individual advertises for the performance of services.

It is important to note that each case has to be considered on its own facts and the various factors have to be weighed against each other.  Usually, general control is sufficient to consider the relationship as employment while the existence of a written contract typically indicates independent contractor status.  Favret Carriere Cronvich can help you determine the relationship’s status as well as pros and cons of each arrangement.

Reference: http://www.laworks.net/Downloads/UI/WTS/UI_ContractorsGuidelines.pdf

Should you have any questions or you would like to discuss this issue in further detail, please do not hesitate to contact us to schedule a free consultation.