Source: http://hrcare.com/Article.aspx/189/EmployeesorIndependentContractors
Timestamp: 2019-04-25 16:48:16+00:00

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In managing human resources issues, the first critical issue to be determined is whether a person providing service for the business is, in fact, an "employee". If an "employment" relationship exists, a number of independent, legal obligations arise for an employer ranging from minimum wage and overtime requirements under the Fair Labor Standards Act to workers' compensation, unemployment compensation, and federal and state income tax withholding. On the other hand, if the person providing the service is an independent contractor, the legal obligations for the contracting business may be fairly minimal. Relationships with third parties are also dramatically impacted if the person who is providing service on behalf of the company is an employee as opposed to an independent contractor. Employees, particularly management or supervisory employees, have the capacity to legally bind the employer by their actions. On the other hand, independent contractors will not normally create liability for a business by virtue of their actions toward a third party.
Respondeat Superior. In common law, the term respondeat superior, literally "let the master answer", arose in ancient Greek and Roman law. It was used to describe the existence of an agency relationship between an employer and a servant acting within the scope of employment. The doctrine of respondeat superior intervened to prevent employers from walking away from liability for the negligent acts of servants which harmed others. The courts supported the respondeat superior doctrine based upon traditional notions of fairness and equity. The doctrine remains viable to this day and employers should be mindful that the actions of agents, particularly supervisors and managers, may bind the employer to liability in tort under the common law.
Who is an "employee"? The definition of who is an employee under a particular statute will depend upon the provisions of that law. Many statutes, such as the Labor Management Relations Act, Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, and the Fair Labor Standards Act to name only a few, define the term "employee". Interpretive case law under these statutes produces differing definitions for employee.
As a general rule, an individual who works for a business is an employee if the business controls the general manner and means of accomplishing a particular task. On the other hand, where a company does not control the methodology and means for accomplishing a task, but is simply interested in the final result, the person providing the service is likely to be an independent contractor.
1. Right to hire and fire.
2. Right to arrange working schedules.
4. The term of the relationship.
5. The party responsible for providing the place of work and equipment.
6. The skill required for the position in question.
7. Both parties' intentions in forming the relationship.
8. Whether the employer provided any benefits to the employee.
9. The method of compensation.
In examining the above factors, the courts will determine the extent to which either party has the right to exercise the factor and what the history of the relationship is as it relates to each factor.
1. The worker's opportunity for profit or loss and the amount the worker had invested in the business.
2. The degree of skill required for the work.
3. The length or duration of the relationship.
4. The degree of control exercised by the employer.
"Means and Methods" of performance. Given the myriad of tests applied to define an employee, an employer should generally focus on the common law test to determine whether an individual truly is an employee or may be held to be an independent contractor. In the final analysis, the extent to which the employer exercises control over the "means and methodology" of performance remains the most likely indicator of employment status.
As a practical tip, in order to avoid having an independent contractor labeled as an employee, it is wise for a business to enter into a written agreement with contractors. While the parties attempts to place a label on the relationship is not determinative, it certainly at least signals from the outset the parties belief that an independent contractor relationship exists.
IRS. The Internal Revenue Service will typically use the "common law" test, consisting of approximately 20 factors. In many states where unemployment compensation is hinged to the Federal Unemployment Tax Act (FUTA), the state unemployment agencies will also use the "common law" test.
Department of Labor, Wage and Hour Division. Because the general approach under the Fair Labor Standards Act has been an extremely broad construction of the employment relationship, the "economic realities" test remains viable under the FLSA.
EEOC. Where the EEOC and the courts are examining issues of discrimination, the "hybrid" test has been used most frequently. In essence, the finder of fact will look at both the employer's right to control and the extent to which the services rendered are an integral part of the employer's business.
Practical suggestions on employment and independent contractor issues.
1. Lower level managers should be instructed to be careful of how they refer to the relationship between the service provider and the business. Generally, communications between the business entities should, if possible, be at upper levels of the business. Discussions should be directed toward "goals" to be accomplished as opposed to specific instructions on the manner and method of accomplishing the goals. Any instructions to be given to rank and file employees should come from the management of the independent contractor.
2. The business for whom the service is provided should carefully avoid disseminating employee handbooks or other types of materials to the contractor which may infer that an employment relationship exists with the service providers of the independent contractor.
3. Obviously, the service providers of the independent contractor should never be referred to as "employees".
4. Communication with the service providers should be as minimal as possible to again avoid the inference that the business is controlling the "means and methodology" of the service to be provided.
In conclusion, the status of the service provider for any business is a critical issue. Significant tax ramifications and other legal obligations attach to an employment relationship. As a consequence, an employer is well advised to careful structure relationships with independent contractors and volunteers to ensure that such service providers are not determined to be employees of the company.
Deal v. State Farm County Mutual Insurance Company of Texas, 5 F.3d 117, 119 (5th Cir. 1993).
Brock v. Superior Care, Inc., 840 F.2d 1054, 1059 (2nd Cir. 1988).
United States v. Silk, 331 U.S. 704, 67 S.Ct. 1463 (1947); Franco v. Bally, Inc. 987 F.2d 86 (2nd Cir. 1993).
Nationwide Mutual Insurance Company v. Darden, U.S., 112 S.Ct. 1344 (1992).
Haavistola v. Community Fire Company of Rising Sun, Inc., 6 F.3d 211 (4th Cir. 1993).
Smith v. Berks Community Television, 657 F. Supp. 794 (E.D. Pa. 1987): Graves vs. Women's Professional Rodeo Association, Inc., 907 F.2d 71 (8th Cir. 1990).

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