One thing we are learning from the modern “gig economy” is the value of choosing to engage independent contractors in addition to having employees. Independent contractors are an efficient means to outsource highly specialized, short-term work, or to source niche expertise on specific projects. Independent contractors are not employees. Therefore, they are not owed regular wages or employee benefits and employers are not required to pay payroll taxes for them. Considering the lack of tax and benefit obligations, engaging independent contractors often means significant savings for the business.
Many businesses do not realize that an “independent contractor” is a legal concept, rather than a simple label. Failing to properly consider what makes an individual an independent contractor under applicable law can have significant consequences. Independent contractors who are functionally acting as employees, even if under an independent contractor agreement, can bring claims against the business for wage and hour violations, unpaid employment taxes, and more. This could, and often does, lead to costly litigation and potential penalties for the business that employed them.
It is essential that businesses who utilize independent contractors understand what exactly differentiates an independent contractor from an employee so that they can ensure their workers are properly classified.
Which test applies?
There are several tests used by different courts and administrative agencies to determine exactly what factors are considered in determining independent contractor status. For example, in Oregon, the Bureau of Labor and Industries Civil Rights Division uses the “right-to-control test,” while wage and hour violations in Oregon are analyzed under the “economic realities test.” On a federal level, the proper test for analyzing independent contractors has been almost constantly in flux in recent years.
Because the test for independent contractors varies widely and changes often, employers should keep all of the relevant factors in mind when determining classification status. Such factors include, but are not limited to, the degree of control the employer has over the work performed, the degree of skill required to perform the work, the method of payment, and whether the employer furnishes equipment.
As a best practice, employers should compare the duties and obligations of every independent contractor they engage with the applicable test to ensure that they are being properly classified at the start of the relationship.
Independent Contractor Agreements
The formalized agreement or contract between the employer and the independent contractor will be one component of a court or administrative authority’s analysis in a misclassification dispute. Accordingly, that agreement should clearly and unmistakably set forth the scope and nature of the relationship between the business and the independent contractor, with specific attention to the factors previously discussed.
There are no “magic words” that ensure an independent contractor agreement is free from risk of misclassification. For example, the mere use of the term “independent contractor” will not mean that a court deems that person an independent contractor under the law. Nonetheless, employers should be careful with the language they include in independent contractor agreements and be sure to avoid any description of the role that aligns more closely with an employee-employer relationship.
Beyond the Agreement
While having an agreement that complies with the relevant standards is a great first step, employers should be careful not to rely heavily on that agreement. Rather, employers should be sure that the day-to-day of the independent contractor’s role aligns with that of an independent contractor as defined by law.
For example, if the agreement specifies, as it should, that the independent contractor has sole control over the manner and means of accomplishing their goal, employers should be careful not to provide any direction to the independent contractor that contradicts that grant of authority. Similarly, if the agreement provides that the independent contractor is to use their own tools and equipment, the employer should not later make such tools and equipment available for the independent contractor’s use.
Overall, the goal should be consistency between the initial independent contractor analysis, the independent contractor agreement, and the independent contractor’s role in practice.
Hiring Contractors
Hiring independent contractors is a worthwhile endeavor for many businesses. To minimize risk and ensure the maximum benefit from those contractors, employers should be attentive to whether the individual is performing work that aligns with independent contractor status and, if so, should demonstrate that alignment both in a formalized agreement and in day-to-day practice.
Lex Shvartsmann is an attorney with Barran Liebman LLP. She advises and represents employers on a wide range of employment matters. Contact her at 503-276-2111 or lshvartsmann@barran.com.
