Employee vs. Contractor: The Wrong Determination Can be Costly
Many businesses – both startups and mature companies — may be surprised to find that workers they have classified as “independent contractors” or “1099’s” may in fact be defined as employees by courts, tribunals, and government agencies – resulting in significant fines and penalties.
Often, employers think they are saving money or administrative hassles by treating a full-time, exclusive employee as an independent contractor. These employers pay a monthly gross fee for services and push the tax reporting and payment issues to the so-called independent contractor. At the same time, such employers avoid the hassle of payroll, withholdings, unemployment insurance, and workers’ compensation insurance among other payments. However, such a solution is a dangerous and potentially costly short-term fix.
In fact, when considering whether a worker is an independent contractor or an employee, courts, tribunals, and government agencies weigh a myriad of factors in order to determine whether a particular worker should be classified as an employee or an independent contractor in the context of such applicable law.
In New York, the courts have adopted a “right to control” test, which focuses on whether the employer holds the right to control the manner and means of an individual’s work, and if so, the individual is more likely to be considered an employee.[1] Other factors that are considered, include (1) work at individual’s convenience, (2) permission to engage in other employment, (3) the offering of fringe benefits, (4) presence of the worker on the employer’s payroll, and (5) the worker’s flexibility of schedule.[2] In general, if a worker devotes full time hours to a single business, is not permitted to work for any other company, receives vacations, commissions, bonuses, and other forms of consideration that are more typically paid to employees, then you can assume that the authorities will treat such person as an employee. Furthermore, in the case that there is an unhappy ending with such “contractor” the contractor could file a report for unemployment insurance or other remedy claiming that the employer sought to circumvent applicable labor laws.
While each state has its own tests that are primarily driven by the determination of the right to control the activities of the worker, California has taken an extreme position on the employee vs. contractor determination. California has adopted a legal presumption that all workers are to be classified as employees unless they meet the independent contractor standards under a test California calls the “ABC Test.”
The ABC Test requires that (1) the worker be “free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact,”[3] (2) the worker perform “work that is outside the usual course of the hiring entity’s business,”[4] and (3) the worker “be customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”[5]
In order to avoid the uncertainty in connection with the classification of workers as independent contractors or employees, it is always recommended to ensure that all workers, whether classified as an independent contractor or an employee, enter into clear, comprehensive written agreements that expressly characterize whether the worker is an employee or an independent contractor and outline other important details and expectations like pay, hours, and workplace location.
The quagmire of classifying workers is an example of the minefield businesses face each day. SLG has extensive experience advising clients on the distinctions between employees and contractors, along with a host of employment law matters, including hiring, employee terminations, employment policies, and other related matters. For further information about SLG’s labor and employment experience, please see our webpage at https://www.shelgroup.com/practices/employment-law/. For more information on how SLG can assist your business, please contact us at info@shelgroup.com.
[1] Stack v. Karr-Barth Assocs., 2021 U.S. Dist. LEXIS 51169 *5-6 (S.D.N.Y. March 18, 2021) (Financial adviser was determined to be an independent contractor where he was permitted work at his ownconvenience, choose the products and clients he worked with, determine the manner and means with which he would solicit those clients and where he would do it from. Control over the means of how work is completed is the most important factor to be considered.).
[2] Bynog v. Cipriani Grp., Inc., 1 N.Y.3d 193, 770 N.Y.S.2d 692, 802 N.E.2d 1090 (N.Y. 2003) (Waiters seeking payment of tips, who were hired for an event at Cipriani, were considered independent contractors as they were temporary waiters and not employees and were therefore not entitled to such tips.); alternatively, see Cornejo v. Eden Palace Inc., 2020 N.Y. Misc. LEXIS 2317 (N.Y. Sup. Ct. 2020) (Waiters seeking payment of tips, who were routinely hired to serve catered events and banquets at Eden Palace and who were penalized for not accepting gigs were not immediately considered independent contractors.)
[3] CAL. LAB. CODE § 2775(b)(1).
[4] Id.
[5] Id.