Independent contractors are not employees. An employer need not pay for their benefits or insurance and is not required to withhold taxes from their pay checks. Unfortunately, an independent contractor that should have been classified as an employee carries hidden costs in the form of unpaid wages and penalties. Even properly classified independent contractors can still create liability for a business.
The IRS did a study in which it found that millions of U.S. workers were misclassified as independent contractors. (Report of Treasury Inspector General for Tax Administration (June 14, 2013) Reference Number: 2013-30-058: “Employers Do Not Always Follow Internal Revenue Service Worker Determination Rulings”.) The IRS and other federal and state agencies are much more carefully looking into potential misclassification now than in the past. If an employer has a doubt about whether an independent contractor might actually be an employee, it should take the time and effort to investigate the legal issue. Reviewing the independent contractor relationships is not always easy, in part, because each federal and state agency may have a slightly different list of factors it uses to determine which workers are independent contractors. Please see my past article: Independent Contractor: Stepped Up Enforcement (May 2015).
When entering into independent contractor relationships, businesses can draft agreements that will help to protect them. Agreements are not full proof, because the agencies and suing attorneys will look at what the worker does, not what the agreement says. However, a tightly worded agreement can help. For instance, an agreement should never use the term “at-will” when referring to the status of an independent contractor. Only employees are “at-will”. Simply describe the parameters of the tasks the worker must perform. Also, avoid non-compete clauses. That type of control normally is for employees who perform the core functions of the employer’s business. In most cases, independent contractors have their own businesses that are not directly related to the business for which they work. Think of outside lawyers, accountants, consultants, and other types of professionals. If the worker potentially will compete with the business after leaving the company, they were probably employees.
Even properly classified independent contractors can create liability headaches for a business. When a properly designated independent contractor harasses a protected employee, the business can be liable for those acts. That is true of other discriminatory conduct too. Sometimes independent contractors get hurt at job sites. When that happens, they are not covered by Workers’ Compensation insurance. If the business arguably caused the injury through negligence or another theory, the injured contractor may sue.
Often, independent contractors are cheaper and less headache than an employee, but the downside can be very steep if the designated worker is not really and independent contractor. However, even a properly designated independent contractor can create liability for a business.
S. Ward Heinrichs, Esq.
Employment Law Office of Ward Heinrichs
4565 Ruffner Street, Suite 207
San Diego, CA 92111
(858) 408-7543 (fax)