Photo by Luke Mattson

Entering into an independent contractor agreement can be quite beneficial to both the worker and the company. Hiring an independent contractor means fewer burdens and formalities than hiring an employee. More freedom exists for both parties to initiate or cancel the relationship. Independent contractors typically provide their own equipment and are independently certified or qualified to perform the services, which means less training obligations for the company. Furthermore, an independent contractor retains the right to provide services for any other business that enlists him or her.  Sounds like a win-win, doesn’t it?

Well, despite the advantages of hiring an independent contractor, there is still some risk involved. If a court determines that your company has treated the worker as an employee rather than an independent contractor, you may be required to provide additional benefits to the worker such as Worker’s Compensation and overtime pay.  So how does one stay on the right side of the independent contractor rule? We’re glad you asked!

An independent contractor’s status is primarily determined by the extent to which the worker and the company are economically dependent on each other. The following “economic realities” test outlines factors relevant in determining independent contractor status:

  1. Whether the work performed is an integral part of the employer’s business;
  2. Whether the worker’s managerial skill affects the worker’s opportunity for profit or loss. If it does, that effect on the opportunity for profit or loss favors independent contractor status.
  3. The extent of the worker’s investment relative to the employer’s investment. If the company has invested significantly more than the worker in supplies and equipment, the worker might be economically dependent on the company, which favors employee status.
  4. Whether the worker has special skills and initiative. Special skills and initiative relating to the work performed shows economic independence, which favors independent contractor status.
  5. The length of time for which the services are to be performed. A permanent or indefinite relationship between the company and worker favors employee status.
  6. The nature and degree of the company’s control. A worker must control meaningful aspects of the services to be considered an independent contractor.

No single factor is determinative; rather, the factors are weighed as a whole in an effort to determine the worker’s status. For example, Uber and Lyft drivers connect with clients through technological platforms provided by the companies. These drivers have generally been considered independent contractors, because they provide and manage their own vehicles, create their own schedules, are paid directly from clients, are not performing the essential function of the company (this point is hotly debated), and often perform the service for multiple companies. However, the more economically dependent the company and worker become on one another, the more likely a court is to follow the presumption of employee status.

For example, a court recently ruled an Uber driver was an employee because she worked exclusively for Uber, she performed a service that generates virtually all of the company’s revenue, and she was subject to certain company controls like background checks and technology service requirements. While this ruling is still very controversial, it shows how delicate the tipping point can be in an independent contractor analysis.

In light of the national trend to rule in favor of employee status, your company should stay keenly aware of the relationship maintained with any independent contractor.

Keep in mind that it is wise to hire a worker who is independently licensed or certified to conduct the particular services, and/or regularly conducts these services for other individuals or companies. Also, the worker should not be subject to supervision or direction from your company. Finally, the service should not be a regular or essential part of the business.

This boils down to maintaining the “independent” in “independent contractor.” The focus of your relationship with the worker should always be on preserving that independence. Prior to commencing a business relationship with an independent contractor, it is wise to consult with legal counsel to ensure the contract and services are consistent with current developments in the law.

Disclaimer: The information in this article is presented for informational purposes only, and should not be taken as legal advice. Before acting on any information presented in this article, you should consult an attorney regarding the facts of your specific situation. We would love to hear from you, so please feel free to contact us for a consultation.

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