Sections within this essay:
An independent contractor is a person who performs work or services for another person or company, for pay, but who is not employed by that person or company. The term itself is intended to convey the status of the individual as an independent worker who is a party to a contract for specific work (rather than a contract for employment), the performance of which is not controlled or supervised by the party requesting the service or work. As in any contract, there is no control of the physical conduct of the worker; only the end result (i.e., the fruit of the worker's labor) is accepted or rejected. For example, persons who hold themselves out as "consultants" are often retained by companies "independent contractors" who will provide expertise and assistance without actually being employed by the company requesting their expertise.
The distinction between employee and independent contractor is crucial in determining the application of several important federal and state laws, including those involving wages and withholding taxes, as well as such entitlements as eligibility for workers' compensation. Generally, when disputed, there is no single, dispositive test for government agencies to determine whether workers are independent contractors to a company, or employees thereof. Moreover, different criteria and legal tests are used for determining worker status, because each government agency is concerned with worker classification for a different reason. Accordingly, agencies may use their own independent worker classification criteria, without regard to what other agencies have done. By analogy, this is similar in application to that of a person who might be considered "disabled" for purposes of workers' compensation, but not for social security benefits. Also possible (but not common) is the result that a worker may be deemed an independent contractor in one state, but an employee in another.
Title VII [42 USC § 2000(e)] defines an "employer" as a person or entity who employs 15 or more employees in 20 or more calendar weeks in the current or preceding calendar year. The term "employee" is only loosely defined as "an individual employed by an employer." Importantly, Title VII prohibits discrimination by an employer against any individual "with respect to terms, conditions, and privileges of employment." Once a company or person reaches the status of "employer" under the statute, there may be liability exposure for claims that independent contractors were essentially functioning as employees and therefore entitled to the same privileges and conditions as employees.
Why is the distinction important if Title VII protects any individual, whether an employee or independent contractor? What is meant by the statutory provision is that an employer cannot choose to speciously label one worker as an employee and another as an independent contractor, for the purpose of paying one less than the other or providing less benefit coverage for one than the other, or otherwise illegally discriminate between them. If two workers are substantially performing the same work, for purposes of Title VII claims of discrimination, both will be deemed employees and the employer will be required to treat them equally in "terms, conditions, and privileges of employment."
In adjudicating such claims and controversies, courts often refer to what is known as the "economic realities" of the employment relationship to make a determination of status as applied to the facts presented. In applying an "economics reality test" to the situation before it, a court will review the employment relationship of the parties to see if the worker in question is actually functioning as an employee, because the worker performs most of his work for the employer and derives most of his income from the employer. Conversely, if the worker held himself and his services out to several companies, and derived his overall income from several of them, he might be more appropriately deemed an independent contractor.
Still, other courts find the economic realities test too superficial, and instead look to the common law for guidance. Under the common law standard, the primary emphasis is on a review of the degree of control and autonomy the worker has over his hours, methods used to complete the work, and materials used for the work. If the employer only looks to the end result, the worker is more likely an independent contractor. A milestone court decision on this matter was the case of Viscaino v. Microsoft Corp, (9th Circuit, 1997). Microsoft had routinely brought in outside "independent contractors" to work on various software programs. Microsoft needed their expertise, but made them sign contract agreements, in which they understood that they were not employees of Microsoft. Many of them worked several years in this capacity for Microsoft, and ultimately, a group of them filed suit under ERISA, hoping to recover lost pension and other benefits. Microsoft defended that these individuals were "independent contractors" and had accepted the work with that knowledge and understanding. The Court thought otherwise. It found that the workers had assigned desks, assigned phone numbers, and were otherwise treated essentially as Microsoft employees. In fact, the only difference was that they did not receive company-paid benefits. Microsoft lost the case.
Likewise, claims also may be brought under the Equal Pay Act [29 USC § 206(d)], which amends the Fair Labor Standards Act (FLSA). Generally, for wage/hour claims, the "economic realities test" in used in determining the true status of the worker. An example of this type of claim might involve an independent contractor who is to be paid a contract amount when the work is completed, but in reality, that amount is less than the minimum wage or does not account for applicable overtime pay. If the worker is deemed to be actually functioning as an employee, the employer may be liable for monetary damages.
The old Civil Rights law, passed during the post-Civil War era [42 USC § 1981] prohibits discrimination upon the basis of race in making and enforcing contracts. This has provided a cognizable cause of action for independent contractors involving their contractual relations with employers. (See Danco v. Wal-Mart Stores, 1st Circuit, 1999.)
Definitions found in the ADEA [29 USC § 621] are similar to those in Title VII, except that an "employer," for purposes of the ADEA, must employ 20 or more employees for each working day in 20 or more calendar weeks in the current or preceding calendar
Unlike Title VII and the ADEA, the Veterans' Reemployment Rights Act [38 USC § 4301] defines an employer as any person or entity "that pays salary or wages for work performed or that has control over employment opportunities." Under this Act, discrimination is prohibited against applicants as well as employees, due to their absence for service-related reasons.
Under the FMLA, an employer is defined as any person or entity that employs 50 or more employees for each working day in 20 or more calendar weeks in the current or preceding year. Eligibility for family leave is premised upon the completion of 1250 hours of service and a work status for at least 12 months. Because the FMLA incorporates FLSA definitions, the same rules would apply in determining worker status (the economic realities test).
Companies ("employers") also may be liable to temporary workers who are employed through third parties (such as personnel agencies). Case law holds that the personnel agency is generally deemed to be a nominal employer and the end-user company is the true employer. In the alternative, some jurisdictions have found that both are joint employers of the worker.
However, where an agency is merely leasing back employees to the company and has no meaningful contact with them, only the end-user will be found to be the employer.
Employers are not required to withhold taxes from independent contractor earnings. Instead, they file information returns to the Internal Revenue Service and state authorities, indicating the amount paid in wages to the independent contractor. This information is also provided to the contractor on IRS Form 1099-MISC.
The Internal Revenue Code and various state laws impose substantial penalties on employers for improper classification of employees as independent contractors. Likewise, the Code imposes penalties and fines upon independent contractors who either fail to report income or who do not file self-employment quarterly returns. Additionally, the independent contractor will have to back-pay all taxes and social security deductions accrued during the misclassified period, in addition to those currently due.
Penalties to employers for failure to withhold income taxes are generally equal to 1.5 percent of the wages, plus 20 percent of the social security and medicare taxes that should have been paid by the employee. There is also a liability for the unpaid portion of the employer's portion of the social security and medicare taxes.
In summary, the following factors are key in determining whether a worker is more correctly classified as an employee:
"Employer's Supplemental Tax Guide" (Publication 15-A) Internal Revenue Service. Washington: GPO, 2005.
Matthies Law Firm, P.C. "Treatment of Independent Contractors under Discrimination Laws." Undated. Available at http://members.aol.com/mattlawfrm/indcont.html
64 North Union Street, Room 651
Montgomery, AL 36130
Phone: (205) 242-3460
P.O. Box 1149
Juneau, AK 99802
Phone: (907) 465-2700
800 West Washington Street
Phoenix, AZ 85007
Phone: (602) 542-4515
10421 West Markham Street
Little Rock, AR 72205
Phone: (501) 682-4500
P.O. Box 603
San Francisco, CA 94101
Phone: (415) 737-2600
600 Grant Street
Denver, CO 80203-3528
Phone: (303) 837-3801
200 Folly Brook Boulevard
Wethersfield, CT 06109
Phone: (203) 566-4384
820 North French Street
Wilmington, DE 19801
Phone: (302) 571-2710
2000-14th Street NW
Washington, DC 20009
Phone: (202) 939-8740
2590 Executive Circle East
Tallahassee, FL 32399
Phone: (904) 488-4398
148 International Boulevard
Atlanta, GA 30303
Phone: (404) 656-3011
830 Punchbowl Street
Honolulu, HI 96813
Phone: (808) 548-3150
Stateouse Mail
Boise, ID 83720
Phone: (208) 334-3950
310 South Michigan, 10th Floor
Chicago, IL 60604
Phone: (312) 793-2800
100 North Senate Avenue, Room 1013
Indianapolis, IN 46204
Phone: (317) 232-2378
Lucas State Office Building
Des Moines, IA 50319
Phone: (515) 281-5960
Landon State Office Building, No. 851, South
Topeka, KS 66612-1258
Phone: (913) 296-3206
127 Building, U.S. Highway 27 South
Frankfort, KY 40601
Phone: (502) 564-3070
P.O. Box 94094
Baton Rouge, LA 70804
Phone: (225) 342-3011
20 Union Street, P.O. Box 309
Augusta, ME 04333-0309
Phone: (207) 289-3788
501 St. Paul Place
Baltimore, MD 21202
Phone: (410) 333-4179
1 Ashburton Place, Room 2112
Boston, MA 02108
Phone: (617) 727-6573
611 West Ottawa Street
Lansing, MI 48909
Phone: (517) 373-9600
443 Lafayette Road
St. Paul, MN 55155
Phone: (651) 296-2342
P.O. Box 1699
Jackson, MS 39215-1699
Phone: (601) 359-1031
421 Dunklin Street
Jefferson City, MO 65101
Phone: (573) 751-4091
P.O. Box 1728
Helena, MT 59624
Phone: (406) 444-3555
P.O. Box 94600
Lincoln, NE 68509
Phone: (402) 475-8451
505 East King Street, Room 602
Carson City, NV 89710
Phone: (775) 885-4850
19 Pillsbury Street
Concord, NH 03301
Phone: (603) 271-3171
John Fitch Plaza, CN110
Trenton, NJ 08625
Phone: (609) 292-2323
1596 Pacheco Street
Santa Fe, NM 87501
Phone: (505) 827-6838
State Campus. Building 12
Albany, NY 12240
Phone: (518) 457-2741
4 West Edenton Street
Raleigh, NC 27601
Phone: (919) 733-7166
600 East Boulevard Avenue
Bismarck, ND 58505
Phone: (701) 224-2661
220 Parsons Avenue
Columbus, OH 43266-0543
Phone: (614) 466-2785
4001 Lincoln Boulevard
Oklahoma City, OK 73105
Phone: (405) 528-1500
1400 S.W. 5thAvenue, Suite 409
Portland, OR 97201
Phone: (503) 229-5737
Labor and Industry Building
Harrisburg, PA 17120
Phone: (717) 787-3756
220 Elmwood Avenue
Providence, RI 02907
Phone: (401) 457-1800
P.O. Box 11329
Columbia, SC 29211-1329
Phone: (803) 734-9594
700 Governors Drive
Pierre, SD 57501
Phone: (605) 773-3101
501 Union Building
Nashville, TN 37219
Phone: (615) 741-2582
101 East 15th Street
Austin, TX 78778
Phone: (512) 463-2800
P.O. Box 45802
Salt Lake City, UT 84145-0801
Phone: (801) 530-6701
State Office Building, 120 State Street
Montpelier, VT 05602
Phone: (802) 828-2286
205 North 4th Street, Box 12064
Richmond, VA 23241
Phone: (804) 786-2377
General Adminstration Building, HC-101
Olympia, WA 05602
Phone: (206) 753-6307
1800 Washington Street East
Charleston, WV 25305
Phone: (304) 348-7890
P.O. Box 7946
Madison, WI 53707
Phone: (608) 266-7552
122 West 25th Street, 2nd Floor East
Cheyenne, WY 82002
Phone: (307) 777-7261
