Be Careful When Considering an Independent Contractor

Steven Cesare, Ph.D.

A landscaper from New Jersey called me the other day to talk about a business proposal her company received from an independent contractor (i.e., 1099) willing to take over the company’s Accounts Receivable function. Typically, landscapers entertain independent contractors to fill positions like Arborist, Business Developers, and Information Technology. Over the past several years, this area has gathered increased legal scrutiny, arguing for unwavering caution prior to engaging any independent contractor.

During our discussion, I posed several areas worthy of pause prior to deciding on the proposal, in that the company would be liable for untold back wages, fines, and penalties if after inevitable legal challenge the independent contractors could prove they were in fact employees. To that end, the most infamous case is that which Microsoft was forced to pay $97 million for misclassifying independent contractors.

Here are some concerns business owners must address before hiring an independent contractor. First, if the employer exerts control over the worker, the worker should be classified as an employee; conversely, if the worker demonstrates control over his/her own work habits, the worker may be considered an independent contractor. When preparing to classify a worker as an independent contractor, the company must ask the following questions that correspond to IRS guidelines before making a decision:

Does your company provide the worker with direction about required work hours, where the work must be done, or the sequence in which the work must be completed; let the worker use company tools, materials, or equipment; or specify where the worker must purchase supplies?
Does your company provide any training to the worker?
Does your company reimburse the worker for job-related expenses?
Does your company have more equipment, resources, or materials invested in the work being performed, than the worker?
Does your company insist the worker work only for your company for the entire contract?
Does your company pay the worker without first receiving an invoice?
Does your company have more P&L concerns for the work being performed, than the worker doing the work?
Does your company allow the worker to perform work without first signing a thorough Independent Contractor Agreement?
Does your company provide benefits (e.g., medical, workers’ compensation, vacation) to the worker?
Does your company plan to provide continuous work for the worker after the current project ends?
Does your company expect the worker to perform functions vital to regular business operations?

If the answer is “yes” to any of those questions, the worker may be an employee, instead of a 1099 worker.

Even when a company correctly classifies a worker as an independent contractor, certain actions can still create ambiguity regarding the worker’s employment status. As such, the following key actions identify what a company must NOT do when dealing with an independent contractor:

Subject the independent contractor to the same management control as an employee
Employ an independent contractor lacking an IRS Employer Identification Number
Introduce the independent contractor as an “employee” to anyone
Allow the independent contractor to do the same work as company employees
Distribute a company badge, uniform, or vehicle to the independent contractor
Hire an independent contractor who has not first completed the IRS W9 Form
Represent the sole source of financial income for the independent contractor
Invite the independent contractor to “employee” social functions
Give a company employee handbook to the independent contractor
Hold the independent contractor to the company’s attendance, discipline, or moonlighting policies