What is an Independent Contractor ? And why do you care ?

The Internal Revenue Service andsState taxing and labor authorities have guidelines to determine if the relationship between two parties is that of employer-employee or two independent contractors that have entered into a contract for work, a project or services.

Violating Independent Contractor Status

If a business owner makes the wrong decision and treats an employee as an independent contractor the IRS or the State Tax Department and Department of Labor can rule that the contractor is an employee of the business and can seek all back withholding taxes plus interest and penalties, fine you for not having workers compensation insurance ($200/day) seek back unemployment contributions. Additionally, the business owner would be responsible for any liability against that person as if he were an employee - i.e. if he infringes a third party’s intellectual property, gets in an accident, or harasses other workers and the business owner would be liable for all past benefits to the worker as if he was an employee.

Who is an Independent Contractor?

A general rule is that you, the payer, have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.

Example: Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. She is to receive $1,280 every 2 weeks for the next 10 weeks. This is not considered payment by the hour. Even if she works more or less than 400 hours to complete the work, Vera Elm will receive $6,400. She also performs additional electrical installations under contracts with other companies, that she obtained through advertisements. Vera is an independent contractor.
Independent Contractors

It is vital that you understand the distinction between independent contractors and employees. This affects you and your business.

You may genuinely believe that you have hired people to perform services for you as independent contractors. You may discover that by law they are considered employees and that you are liable for unemployment insurance contributions and interest.

Whether the relationship is one of employer-employee will depend on several factors. These include how much supervision, direction and control you have over the services.

The Employer-Employee Relationship

The courts have found that no single factor or group of factors conclusively define an employer-employee relationship. Rather, all factors are reviewed to determine the degree of supervision, direction and control exercised over the services. Generally, an employer controls what will be done, i.e. the manner, means, and results.

An employer-employee relationship may exist if you:

Choose when, where, and how they perform services
Provide facilities, equipment, tools and supplies
Directly supervise the services
Set the hours of work
Require exclusive services (An individual cannot work for your competitors while working for you.)
Set the rate of pay
Require attendance at meetings and/or training sessions
Ask for oral or written reports
Reserve the right to review and approve the work product
Evaluate job performance
Require prior permission for absences
Have the right to hire and fire

How an individual is compensated is another indicator of worker status. Employees typically are paid a salary, an hourly rate of pay or a draw against future commissions with no requirement for repayment of unearned commissions. Employees may also receive certain fringe benefits, including an allowance or reimbursement for business or travel expenses.

The nature of the services performed is also key to deciding if a worker is an employee or an independent contractor.

Unskilled or casual workers are usually employees because their labor is often supervised. However, even professionals such as doctors and lawyers, who have much freedom to perform their duties, may be employees if they are subject to significant control.

The courts have also found that workers may be employees and that an employment relationship may exist if the employer controls important aspects of the services performed, other than results and means.

For example, a referral agency usually does not directly supervise the individuals it refers for assignments. It could be their employer, however, if it controls such important aspects of the services as:

Client contact
Billing and collection from clients
The individual's wages

The Independent Contractor Relationship

Independent contractors are free from:

Direction and
Control in the performance of their duties.

They are in business for themselves, offering their services to the general public.

Signs of independent contractor status include a person who:

Has an established business
Advertises in the electronic and/or print media
Buys an ad in the Yellow Pages
Uses business cards, stationery and billheads
Carries insurance
Keeps a place of business and invests in facilities, equipment, and supplies
Pays their own expenses
Assumes risk for profit or loss
Sets their own schedule
Sets or negotiates their own pay rate
Offers services to other businesses (competitive or non-competitive)
Is free to refuse work offers
May choose to hire help

An employer-employee relationship may exist regardless of how the hiring party describes it. For example, if you give a worker a 1099 Form rather than a W-2 Form, they may still be an employee. Persons who work for you may qualify as employees under the law, even if, for example:

You have the person sign a statement claiming to be an independent contractor
They waive any rights as an employee
You require them to obtain a dba in order to work for you

Under the Unemployment Insurance Law, an agreement by employees to waive their rights under the law is not valid.

Remember that the real distinction between the employer-employee relationship and the independent contractor relationship depends primarily on the level of supervision, direction and control exercised by the person engaging the services. It is not defined by what the relationship is called by the participants.

Whether the relationship is one of employer-employee will depend on several factors.

Separate Business Entity

The law also contains a twelve-part test for determining when a sole proprietor, partnership, corporation, or other entity will be considered a separate business entity from the contractor for whom it is providing a service. If an entity meets all of the 12 criteria, it will not be considered an employee of the contractor but will instead be a separate business that is itself subject to the new law regarding its own employees.

The statute excludes or covers certain types of services, regardless of the degree of direction and control.

For details on independent contractors, please see our Independent Contractors publication.

If you believe that some of your workers are independent contractors, ask for a formal determination by writing to the address below. Include a copy of any contract and details of your relationship.

©2018 Martin Novar, Esq.All Rights Reserved

Tel: 212-213-9757
Fax: 212-689-9680

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New York, NY 10016
United States