Community Webinar Independent Contractor

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When is an Independent Contractor really independent?

 Independent Contractor vs. Employee  How does it relate to Workers Compensation?  How does it relate to Employment Practice Liability?  Independent Contractor as relates to the construction industry 7

Many clients use “independent contractors” as a means to avoid paying workers’ compensation premium Some clients believe that they are using independent contractors that really aren’t Either by design or by innocent mistake, the penalties for misuse of the hiring process can be extremely costly to your client 8

 An IC is either a person or organization that is hired to perform services under an express or implied contract and is NOT subject to the other party’s control, the manner and means of performing the services  Typically the party engaging the IC is not liable for the acts of the IC  Exceptions apply according to case law – often affects the construction relationship 9

 An employee is a (natural) person who works in the service of another person under an express or implied contract of hire, under which the employer has the right to control the details of work performance ▪ Black's Law Dictionary 10

Previously used a 20-point test Changed in 2010 Now uses three broad areas of criteria 11

Behavior control – hired party: Controls what, when and how tasks are performed Decides tools or equipment to be used 12

Financial control – hired party: Controls how payment is paid Chooses jobs that will be taken Paid for services provided at scheduled rates / not salary Chooses assignments Eligible to make own profit/loss Does not participate in profit/loss of hiring party 13

Type of relationship – the hired party: Signs a written contract with hiring party (not the most important criteria) Does not receive benefits; vacation pay, sick pay, etc. Is not hired to perform services indefinitely Does not perform services that are a key aspect of the hiring party’s business 14

An employee is hired to perform specific work at the direction of the employer Employers must deduct taxes and other required withholdings, such as Social Security / Medicare taxes An employee does not generally have the ability to determine profit/loss relating to their services for the employer 15

The factors designating someone as an employee include: A specific wage or salary An implied or written contract Control of the person's work by the employer 16

The answer to “who is in control” is typically the determining factor of whether a worker is an employee or IC Generally: anyone performing services for an organization if the organization controls what is done, how it is done, where it is done and when it is done 17

 It is important to note that the IRS assumes that a worker is an employee. It is sometimes difficult to determine the status of a worker. If you are unsure whether to classify a worker as an independent contractor or employee, you can file a Form SS-8 to request a determination.Form SS-8 18

 Many states have guidelines  Examples:  Oregon typically follows the IRS standards  Rhode Island – an IC must self-certify  Massachusetts – has put GC on notice they are responsible for WC coverage for an IC creating a presumptive employee – employer relationship 19

An IC runs their business, handles their own taxes and deductions, decides to take a job or not An employee does not run their own business and relies on the employer to withhold taxes and other deductions If the employer misclassifies the person as an IC - the employer can be subject to fines and penalties 20

Less costly Special expertise - Able to perform work required efficiently and immediately More leeway and flexibility in staffing a project Reduce exposure to employee- related litigation 21

Ability to fire may be limited by the terms of the IC agreement Quality of work may be uneven No stability of work force Less control over workers 22

May be liable for on-site or project site injuries This is not WC and thus subject to exclusive remedy but rather tort Intellectual property owner Greater risk of federal/state agency audits 23

 Oregon typically follows the IRS standards  Rhode Island – an IC must self-certify  Massachusetts – has put GC on notice they are responsible for WC coverage for an IC creating a presumptive employee – employer relationship 24

 NY has stated that if it a reasonable risk that ICs could be misclassified, then it is reasonable for the WC insurer to charge premium to the “employer” unless IC can prove WC coverage 25

 California has the following guidelines for ICs:  Independent business / holds a business license  Control over the work / provides tools or equipment  Is paid by the project (not by time)  No fraudulent misclassification  Performs services not generally part of business  Intends to establish an IC relationship 26

 The principal body of law governing retirement, health care, disability and similar types of benefit plans is the Employee Retirement Income Security Act of 1974 ("ERISA"),  The Court has described the common law tests to use 27

 An employee: the “conventional master- servant relationship as understood by the common law agency doctrine."  An IC: the hiring party's right to control the manner and means by which the product is accomplished"  Did not adopt the IRS “test” but in the Darden case, identified 12 specific points to determine IC status 28

 Skill required  Source of tools and instrumentalities  Location where work performed  Duration of relationship of parties  Hiring party's right (or lack thereof) to assign additional projects  Hired party's discretion over when and how long to work 29

 Method of payment  Hired party's role in hiring and paying assistants  Whether the work is part of hiring party's regular business  Whether the hired party is in business  Whether "employee benefits" are provided  The tax treatment of the hired party. 30

Can be severe Taxes / fines / penalties both state and federal Civil damages and lawyer’s fees Benefits / pension / profit sharing plans Stock options 31

 The 9 th Circuit Court of Appeals ruled in this case (and the USSC refused to hear the case) that temporary employees and “freelancers” hired by Microsoft in the late 1980’s and early 90’s were in fact employees at least for their inclusion in the Savings Plus and the Stock Purchase Plan established by Microsoft for its employees 32

 Much of the litigation could been avoided if the benefit plans had been drafted differently and if the company had not made a key concession early in the case.  Businesses must review and, where appropriate, amend their benefit plans and forms of contract  Legal and accounting advice is critical to structure properly 33

 A group of loan originators executed agreements stating they would be Cragin's Ics and not employees for all purposes" sought to participate in Cragin's employee stock ownership plan ("ESOP").  The Court of Appeals held that the agreements established they were not employees and, therefore, not entitled to participate in the plan 34

 A group of newspaper carriers who signed IC agreements with no-benefits language were reclassified by the IRS as common law employees for employment tax purposes.  The Court of Appeals upheld their exclusion from the company's retirement plans, finding that the individual contracts alone were a sufficient basis for excluding the workers 35

 New York Life was sued by one of their agents who claimed that the company terminated his agency contract in violation of ERISA and ADEA  The agent had to establish that he was an employee and not an IC  After applying the Darden factors to the agency contract, the court concluded that the agent was an independent contractor. 36

 The court found some employee related factors  Life insurance, pension and 401(k) plans  Company trained agent during first 3 yrs  Not persuasive  Court found persuasive the signed contract where, in clear language, Barnhart would be an IC, paid commission and claimed self- employment on his tax returns 37

 Request and receive W-9  Provide 1099 Miscellaneous  Require copy of business license 38

Require Certificate of Insurance CGL BAP WC Umbrella Professional liability 39

 Confirm status by creating a written contract that includes the status as IC that includes a statement that the IC assumes responsibility for taxes, withholdings and insurance  Get advice  Lawyers  IRS can determine if IC by submitting Form SS-8 – Determination of Employee Work Status 40

 Depending on the state – insurer could charge premium based on reasonable expectation of misclassification  Clients should always verify that a hired IC provides WC coverage for employees 41

 Most EPLI policies exclude IC from coverage  Include third party discrimination and harassment coverage to fill the gap 42

 Majority of forms exclude IC from coverage 43

 This area is developing law around the country in both state and federal courts  Help your client understand that just by calling someone an IC doesn’t make it so  Give them insurance guidance but don’t step over the line into the area of law 44

 Laurie Infantino    Marjorie Segale  