United States: Are They Contractors?

Originally Published in Business NH Magazine

As businesses ratchet up their hiring—and fight for talent—some will reassess whether positions need to be full time, part time, farmed out to freelancers or some other type of arrangement.

This often leads to the issue of independent contractors. Most businesses are now starkly aware of the recent efforts by state and federal regulators to ferret out independent contractor misclassification. What started as a concern in the construction industry is now affecting all types of businesses, and there continues to be confusion about how to properly classify a worker.

The Tests

The issue is addressed by a number of agencies including the NH Department of Labor, NH Employment Security, the Department of Revenue, the Internal Revenue Service and the U.S. Department of Labor. The various tests used to determine employee status can be a minefield for companies legitimately trying to get it right.

A bill introduced in the NH House (HB 450) during the last legislative session would have established a uniform definition of employee for New Hampshire's wage and hour, unemployment and worker's compensation laws. The statute would have clarified the criteria and brought some consistency among the various agencies.  But HB 450 did not pass.

The federal government is now sharpening its focus.  On July 15, 2015, the Administrator of the US Department of Labor issued a document entitled The Application of the Fair Labor Standards Act's "Suffer or Permit" Standard in the Identification of Employees Who Are Misclassified as Independent Contractors. The lengthy document focused on the "Economic Realties Test" used to determine whether workers are truly independent.

The questions to be asked in conducting the analysis follow:

  • Is the work being performed an integral part of the employer's business? If so, the worker is likely not independent as he or she would more likely be economically dependent on the employer's business.
  • Does the worker's managerial skill affect his or her profit or loss? If not, it is more difficult to view the individual as being established in his or her own business. 
  • How does the worker's relative investment compare to the employer's investment? This is relevant to determine whether the worker has developed his or her own business as an independent worker or freelancer.
  • Does the work performed require special skill and initiative? A worker's business skills, judgment, and initiative, not his or her technical skills, will aid in determining whether the worker is economically independent on the employer. 
  • Is the relationship between the worker and the employer permanent or indefinite? Permanency or indefiniteness in the worker's relationship with the employer suggests that the worker is an employee.
  • What is the nature and degree of the employer's control? The worker must control meaningful aspects of the work such that the worker can be viewed as conducting his or her own business.

The "Questionable" Situations

Some relationships at risk of being challenged include:

  • Individuals with temporary contracts working side by side with a company's own employees, performing similar tasks, using company equipment and taking direction from company management.
  • Individuals who are not employees working in management or sales roles for a company, especially for an indefinite period.
  • Workers in other states performing similar work to local employees but not being treated as employees.
  • Retirees kept on as consultants following retirement but performing similar work on a part-time or as needed basis.

The fact that work is part-time or temporary does not make an employee an independent contractor.

The Risks

The risks of getting it wrong can be significant. Depending on whether a case is before an administrative agency or in court, the business could be responsible for:  back wages for unpaid overtime; medical expenses and lost wages for an individual injured at work but not covered by worker's compensation; responsibility for unpaid payroll and unemployment taxes; and civil penalties.

The first order of business for a company seeking to engage an independent contractor is to review all the relevant statutes and tests and then do the following:

  • Have a written contract setting the mutual obligations and expectations;
  • Negotiate the fee for service on some basis other than hourly payment;
  • Require the contractor to carry his or her own worker's compensation and liability insurance;
  • Determine whether the contractor is in an independent business, preferably established as an LLC or corporation offering similar services to others; and
  • Require the contractor to provide his or her tools, equipment and assistants

This issue is likely to remain challenging.  The US Labor Administrator's guidance sums it up:  "Most workers are employees under the FLSA's broad definitions."  Businesses should heed this warning.

Charla Bizios Stevens is a director in the Litigation Department and chair of the Employment Practice Group at the law firm of McLane, Graf, Raulerson & Middleton, P.A. in Manchester.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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