Nary has a month passed that I’ve not debated the need for a workers ’ compensation policy based on the argument that an “independent contractor” is more likely an employee, in most situations.  That is not to say that the independent contractor relationship doesn’t exist in some instances, it may; just not as often as some would like to argue.  In this issue, I hope to shed some light onto this seemingly gray area of the common law employee versus the independent contractor.  

According to the Internal Revenue Service, an employee is “anyone who performs services for you if you can control what will be done and how it will be done”.  One could argue that when an independent contractor is hired, the contract, whether expressed or implied will dictate the “what and how”.  But does it really?  In most instances, when an independent contractor relationship is examined, the “what” is easily identified and agreed upon however, few details exist regarding the “how”, as the independent contractor should possess the knowledge, skill, materials and tools to get the job done.   The IRS goes on to suggest that individuals such as lawyers, contractors, sub-contractors, and auctioneers or anyone who follows an independent trade, business or profession in which they offer their services to the public are generally not employees.  Furthermore, independent contractors typically work as sole proprietors or under the veil of a corporation.  Does your worker own a business?  Do the services they’re providing fall within the scope of work offered by their business?  If so, that may suggest that they are indeed an independent contractor. 

Employees on the other hand are typically managed day to day.  They are given specifics as to what their job is, how and when their job should be performed and are likely provided the necessary tools and resources to carry out the orders received from the employer.  If the employer controls or has the right to control the “what and how”, and if the work is performed on a regular and consistent basis by the worker, the relationship is likely that of an employer-employee. 

Still confused?  Let’s continue…  

Marv, owner of Marv’s Marvelous Menagerie occasionally employs his nephew, Benjamin Benevolent at his place of business to feed and groom the acres of wild animals enjoyed by hundreds of loyal visitors.  Because the menagerie is open to the public from 9 am to 5 pm, seven days a week, Marv provides Benji with a weekly schedule, dictating when he should come to feed and groom the animals.  Because Benji also works at a nearby pet store, it is essential that Benji start his day early, filling up dozens of receptacles with food and water for each of the menageries’ 20 different species.  Some of the animals require grooming which is also performed by Benji in a barn on the property.  The barn is outfitted with the various tools of the trade, making Benji’s job much easier especially having been formally trained by Marv on the proper care and feeding of animals. 

Things go well until one day, while Benji is filing the claws of an Emu, he loses and eye rendering him permanently and partially disabled.  As Benji’s medical bills escalate, he suggests that because he was injured at work that his employer, Marv’s Marvelous Menagerie would gladly pay the bills.  Upon receiving word that he would be held responsible for Benji’s injuries, Marv disagrees on the grounds that he and his nephew Benji came to an “agreement”, and further insisted that because of Benji’s “occasional” employment, his relation to Benji and the fact that he had Benji sign a written agreement deeming Benji and independent contractor, he would not be paying any medical bills.  Marv also stated that Benji had originally suggested that he would work for free and that it was Marv that demanded that Benji be paid and issued a 1099 so as to further solidify the independent contractor relationship.

In the example given above, would Benji be considered and employee of Marv’s Marvelous Menagerie or would he be considered an independent contractor? 

The Employment Development Department suggests that an independent contractor agreement between an employer and a worker is not enough to accurately depict the relationship and that the actual practices of the parties in a relationship are more important than the wording of an agreement. Secondly, the mere act of issuing a 1099-MISC does not constitute an independent contractor relationship between a worker and an employer, nor does being a family member of the business owner preclude one from the title of employee. 

Business owners should err on the side of caution when determining whether or not there exists a need to insure for injury, illness or death of those individuals performing work on their behalf.  If it is unclear whether or not a worker is an employee or an independent contractor, ask yourself this simple question; in the event an individual is injured or killed while performing work at my direct request and under my direction, using facilities, materials and tools provided by me, who would be responsible to indemnify the worker or the workers family?  If you can’t clearly answer that question, you may find yourself in unwanted litigation.  

In addition to the ethical and moral consequences of erroneously or intentionally classifying a worker as an independent contractor when that worker is later confirmed as an employee, failing to procure worker’s compensation is a misdemeanor offense in the State of California which is punishable by a fine of up to $10,000 or imprisonment for up to one year or both.  Furthermore, if an injured employee files a claim that goes before the Workers’ Compensation Appeals Board and a judge finds that the employer had not secured insurance as required by law, the employer may be assessed a penalty of $10,000 per employee on the payroll at the time of the injury if the workers’ case was found to be compensable for a maximum of $100,000, as outlined by the California Department of Industrial Relations.  This further justifies the need to properly classify workers so as to determine the need for workers’ compensation insurance. 

In most instances and with ample research, one will find that the correct classification of a worker is likely that of employee however, there are no clear cut definitions of an employee or independent contractor.  Consult your CPA, attorney, human resource professional or insurance broker when attempting to determine whether your worker is an independent contractor or employee.  The additional expense of having classified a worker as an employee will be a pittance compared to the legal and financial ramifications of wishful thinking.  Thorough documentation is crucial when making your determination.

The following resources may be helpful when determining whether or not your worker is an employee or independent contractor: 

• Department of Industrial Relations at http://www.dir.ca.gov/ 
• Internal Revenue Service at http://www.irs.gov/ 
• Employment Development Department at http://www.edd.ca.gov/
• California Tax Service Center at http://www.taxes.ca.gov/

 9 Common Misconceptions as outlined by the Employment Development Department

1. If I issue an Internal Revenue Service Form 1099-MISC, the worker is an independent contractor. 
2. If I pay a worker less than $600 in a year, then the worker is not subject to California payroll taxes.
3. The part-time, temporary, probationary, and substitute workers I employ are day laborers or casual laborers, not employees.
4. When a family member works for me, he/she is not an employee.
5. My worker and I have signed a written contract that makes my worker and independent contractor.
6. My competitors treat their workers as independent contractors; therefore it is okay for me to treat my workers as independent contractors.
7. My worker performs similar work for other businesses so the worker is an independent contractor.
8. My worker has a city business license and a business card, so the worker is an independent contractor.
9. I pay my workers solely by commission; therefore, they are independent contractors.

 Mike Nutter

Mike Nutter is a contributing writer for the High Desert Business Journal.  For advertising opportunities, please contact Lisa Iskandar at lisaiskandar@hotmail.com or call (760) 964-9056.