Employee or Independent Contractor? Making the Proper Determination in Your Nonprofit February 2, 2005

Classification Challenges Regulatory interpretations differ Court decisions (trial and appellate) may give different view No single definition; no single test The nature of the Nonprofit World— time constraints, mission focus, lack of HR expertise

Statutory Definitions? May be of little help:  Title VII and the ADA- Congress adopted a circular definition of “employee” — an employee is an “individual employed by an employer.”

What’s the difference? Practical:  Independent contractors require less of an administrative burden  payroll processing and taxes  workers’ compensation  what else?  Flexibility is greater with contractors; no expectation of continuing relationship

What’s the difference? Liability Risk:  Liability risk is less (e.g. federal anti- discrimination laws don’t apply)

Consequences of an Error Key: choosing IC over employee status  back-taxes on wages  financial penalties and interest  additional wages due (e.g. FLSA)  workers’ compensation  liability for wrongful employment practices  attorney’s fees

How does a Nonprofit Employer get caught? Targeted investigation? Employee whistleblower Application for unemployment benefits Harassment or discrimination complaint with the EEOC IRS audit INS audit

Learning to distinguish employees from independent contractors IRS 20-Factor Test Labor Department’s Economic Reality Test Common Law Control Test

IRS 20-Factor Test No factor is determinative Document that your independent contractors, consultants and free-lance workers meet these criteria 1. Control 2. Responsible for hiring and supervising others

IRS 20-Factor Test 3. Reimbursement 4. Separate business address 5. Work not typically performed by employees 6. Significant investment 7. Other clients? 8. Where will the work be performed?

IRS 20-Factor Test 9. Economic dependence 10. Need for specialized instruction 11. Participation in in-house training 12. Specialized skill 13. Own tools, equipment 14. Unsatisfactory performance-is payment due?

IRS 20-Factor Test 15. Is full-time status required? 16. Method of payment 17. Entitlement to fringe benefits? 18. Regular or set hours? 19. Authority to hire or supervise the nonprofit’s staff? 20. Continuing relationship

Labor Department Economic Reality Test Total activity or situation controls. Significant factors include:  degree to which services are integral to employer’s business  amount of contractor’s investment in facilities and equipment  nature and degree of control  contractor’s opportunity for profit and loss  amount of initiative, judgment or foresight  degree of independent business operation

Common Law Control Test Anyone who performs services for you is employee if you can control what will be done and how it will be done. Key: right to control. Facts that provide evidence of control:  behavioral control  financial control  type of relationship

Proceeding with care Examine duties and position in light of 20- factors. When employing contractors, seek most qualified for the job and established business Always negotiate a written contract before the work begins Never use employees and contractors to perform the same task.

Independent Contractor Cases Lerohl v. Friends of Minnesota Sinfonia Appellate Court ruling:  independent contractor may be required to work to exacting specifications of the hiring party  persuasive evidence? Musicians could choose whether or not to perform at concerts sponsored by the Sinfonia

Independent Contractor Cases Woolf v. Mary Kay Cosmetics Insurance agency manager case Compassion versus deviating from policy and practice Classify with care Punitive damages: company acted with “oppression or malice”

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