Many businesses prefer to hire independent contractors because there is often less overhead and fewer expenses (i.e. taxes). However, classify an employee as an independent contractor and you could possibly be in big trouble. Here are some factors to consider to differentiate between independent contractor and employee.

Who Controls the Worker?

This question is not always easy to answer.  According to the U.S. Internal Revenue Service (IRS), evidence of the degree of control and independence of a worker falls into three distinct categories:

• Behavioral: Does the company control or have the right to control what the worker does and how she performs the job?

• Financial: Are the business aspects of the worker's job controlled by the payer? These include how the worker is paid, whether expenses are reimbursed, and who provides tools/supplies.

• Type of Relationship: Are there written contracts or employee-type benefits such as a pension plan, insurance, sick pay, and vacation pay? Will the relationship continue indefinitely?  Is the work performed a key aspect of the business?

The Department of Labor (DOL) has issued its Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act (FLSA) for help with understanding "employment relationship" and how the determination relates to FLSA and the Wage and Hour Act (WHA). The North Carolina Department of Labor, Wage and Hour Office, for the administration and enforcement of the North Carolina Wage and Hour Act, also follows the DOL's Fact Sheet 13. According to Fact Sheet 13, the DOL has no definitive test, only factors outlined by the United States Supreme Court. The factors are similar to the IRS categories:

• The extent to which the services rendered are an integral part of the principal's business.
• The permanency of the relationship.
• The amount of the alleged contractor's investment in facilities and equipment.
• The nature and degree of control by the principal.
• The alleged contractor's opportunities for profit and loss.
• The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
• The degree of independent business organization and operation.

Let's look at an example involving Jim, John, and Joan.  All three perform work for the ABC Repair Shop.

• Jim works at the front desk, earns $10 per hour, works from 9am to 5pm and takes complete direction for all of his duties from his supervisor.

• John is a mechanic, earns $15 per hour, takes some direction from his supervisor, but only works on an “on call” basis when needed, using the company's tools.

• Joan is a master mechanic, paid depending on the complexity of the job, “generally” works from 9am to 5pm, but decides which autos to work on, uses her own tools, and takes very little direction from her supervisor.

Who is an independent contractor and who is an employee?  Based on the information above, the answer is – it depends.

• It is likely that Jim is an employee as he takes all direction from his supervisor.

• John could be an employee as he uses the company's tools, but working on an on-call basis and only taking some direction from his supervisor makes his designation as an employee less certain.

• Joan is likely an independent contractor as her rate is not fixed, she uses her own tools, and takes very little direction from her supervisor.

Keep in mind that any change in Jim's, John's, or Joan's duties or relationships with ABC could alter their status.  According to the U.S. Department of Labor, misclassification of employees as independent contractors presents one of the most serious problems facing affected workers, employers, and the entire economy.

If the DOL finds that a worker has been misclassified and denied access to critical benefits and protections to which they are entitled such as the minimum wage, overtime compensation, family and medical leave, and unemployment insurance – it can enforce employers to pay, not only going forward, but retroactively as well.

Play it safe.  Call (704) 230-0466 or CLICK HERE to schedule a meeting with our experienced business attorney who can guide you in determining which classifications are correct for your situation. The Brewington Law Firm, PLLC meets by telephone conference, in office or web conference (Zoom/Google Duo/Microsoft Teams).Please give us a call today to set up a meeting.