Is That Worker An Employee? Part II

a. Behavioral Control


The most fundamental difference between employees and independent contractors is that employers have the right to tell employees exactly what to do and how to do it. This is a recipe for disaster for the employer that intends to treat its workers as independent contractors. Whatever you do, don’t supervise or control an independent contractor as if he was one of your employees. It’s perfectly okay to provide detailed guidelines or specifications for the results that you expect from your contractors. But how those results are achieved must be left entirely up to the contractor.

Following these guidelines will show that the independent contractor is truly independent from the employer’s control:

• Do not provide training for contractors. Ongoing training is a particularly strong sign of an employer-employee relationship because it indicates that the company wants services performed in a particular way. However, orientation or information programs about company policies aren’t;

• Do not dictate a contractor’s working hours. However, contractors may be given a deadline for completing the work;

• If possible, the work should be performed somewhere other than the employer’s workplace, unless the work absolutely must be performed on location, as in the case where a contractor is hired to lay carpet or paint walls at an employer’s workplace. As just illustrated, the importance of this factor depends on the type of services involved and whether an employer generally would require employees to do similar work on its premises. The fact that a business requires work to be performed on its premises suggests control over the worker (if the work could be done elsewhere). Work done off the premises, such as at the worker’s office, indicates freedom from control;

• Do not provide instructions to contractors about when, where, and how to do their job. However, instructions regarding government standards are entirely permissible;

• To the extent that your contractors need help, do not be the one to hire, supervise, or pay assistants. A business that hires, supervises, and/or pays assistants for an independent contractor exhibits employer-like control over that contractor. Conversely, the relationship is more analogous to an employer-contractor relationship if the worker is contractually obligated to hire, supervise, and pay his own assistants.


Independent contractors should take steps to show that they are independent businesspersons. A worker exhibits independent contractor status if he:

• Establishes his own business (preferably under a fictitious name rather than under his own name);

• Incorporates that business;

• Maintains a separate bank account for the business;

• Obtains all necessary licenses and permits;

• Carries business insurance

b. Financial Control


The fact that a worker makes his services available to the general public – and not just to one person or company – on a regular and consistent basis indicates an independent contractor relationship. Here are some ways for independent contractors to do this:

• Obtain business cards and letterhead;

• Display a sign (or set up a website) advertising the business;

• Maintain listings in business directories, both on-line and in print;

• Attend trade shows and similar events;

• Join professional organizations;

• Advertise on-line and in newspapers, trade journals, and magazines;

• Mail brochures or other promotional materials to prospective clients.


Because they run their own businesses, independent contractors have the opportunity to earn profits or suffer losses. If a worker runs absolutely no risk of loss, then he’s probably not really an independent contractor. The best way to meet this test is for the contractor to have recurring business expenses, such as office rent, equipment, and salaries for assistants. This demonstrates that the contractor could suffer a loss if he doesn’t find enough work.

A contractor can show an opportunity for profit or loss if he:

• Owns the tools, materials, and other equipment needed to do the job. By contrast, a business that supplies a worker with these items exhibits characteristics of an employer-employee relationship;

• Invests in facilities that aren’t typically maintained by employees. A prime example of this is a contractor who rents or owns his own office. By contrast, an employee usually relies on the employer to provide the facilities needed to do the job.

A contractor can also show an opportunity for profit or loss if he charges his client a set price for a job, rather than billing by the hour or day. Why? Because the contractor will make money if the contract price exceeds his expenses but will come out in the red if his expenses exceed the contract price. However, payment by the hour, week, or month is permissible so long as it is nothing more than a convenient way of paying a lump-sum amount that was agreed upon by the parties as the cost of doing a job.


Payment by the job or on a straight commission basis generally indicates that a worker is an independent contractor.


A worker who performs services for a number of unrelated businesses at the same time generally is treated as an independent contractor. If the nature of the work is such that the worker must work full-time for one client for an extended period of time, then he should try to work for other clients intermittently over the course of a year. For example, he might work for one client for six months, and then work for another client for the rest of the year.


An employer should not ordinarily pay a contractor’s business and/or traveling expenses. Such payments exhibit characteristics of an employer-employee relationship.

c. Relationship of the Parties


While a written agreement alone won’t prove that a worker is an independent contractor, it nonetheless will show that both parties intended for the worker to be an independent contractor. The contract should make clear the following: first, that the worker is providing services as an independent contractor and second, that the employer does not have the right to control the way he does the work.


A company providing employment benefits to a contractor is a big red flag for the IRS. Employment benefits include, but are not limited to, health insurance, paid vacations, and pension benefits.


A company’s requirement that the worker submit regular or written reports indicates a degree of control over the worker that is analogous to an employer-employee relationship.


A continuous business relationship between the worker and the business suggests an employer-employee relationship. A continuous business relationship exists even when a worker is called in at irregular intervals, so long as those intervals are frequent and recurring.


The right to fire a worker militates in favor of an employer-employee relationship. An independent contractor, on the other hand, cannot be fired as long as he completes the work that he was contracted for.

XI. I received a letter from the New Jersey Department of Labor or from the IRS that appears to question my worker classification. What should I do or not do?

Do not call the telephone number on the letter. Do not speak to anyone at the agency who issued the letter, not to ask a simple question, not for any reason at all. Do not send any information to the agency on your own.

Do contact an attorney immediately and engage someone in worker classification issues to represent you before the agency. Your attorney will handle all communications with the agency. Act quickly to engage an attorney so that he has time to respond effectively to the inquiry.

XII. Recommendations to Minimize or Avoid Future Misclassification Exposure for Companies That Use Independent Contractors to Supplement Their Workforce

There are no “quick and dirty” ways to enhance independent contractor compliance, and “one size fits all” solutions are likely to be ill-fitting. There are two alternatives that would permit XYZ Corporation to maintain its use of independent contractors while minimizing or avoiding future liability. Those alternatives include: (1) restructuring and re-documenting the relationship between XYZ Corporation and its independent contractors and (2) redistribution of XYZ Corporation’s independent contractors through a workforce management or staffing company.

While restructuring, re-documenting, and re-implementing might appear to be a daunting task, it is the only way to ensure that XYZ Corporation’s independent contractor model is sustainable and that it withstands legal scrutiny. The process need not be tedious and, once undertaken and completed, will place XYZ Corporation in an enviable position: namely, an enhanced state of compliance that can minimize the likelihood that any regulator or class action lawyer will seek to litigate the company’s past.

a. Bona Fide Restructuring and Re-documentation

The first step that I recommend is to diagnose whether the company’s independent contractors are properly classified. That step, however, may be premature for any business that wishes to consider a bona fide restructuring of its relationship with its independent contractors.

Generally speaking, a bona fide restructuring is recommended whenever the nature of the work is susceptible to being performed in a meaningful manner with substantially less control than is currently exercised. Most businesses concerned with the potential for misclassification liability recognize that, at best, their independent contractors fall within the “gray area,” where some facts favor independent contractor status while others favor employee status.

As such, it is necessary to identify those areas that could be performed in a meaningful manner with less control than is currently exercised. For example, the corporation might consider allowing its contractors to set their own hours of work, perform services from home, supervise their own projects, and work for other companies.

Of course, the only way a bona fide restructuring is possible is if the corporation is willing to embrace it. That would require a willingness on the part of the corporation to make adjustments to its level of control over the manner and means by which its independent contractors accomplish their work.

To the extent that the corporation is willing to restructure, then the first step, even before diagnosing whether the corporation’s independent contractors are properly classified, is to make adjustments to a number of the 48 factors that guide the courts and regulatory agencies in determining how to classify a worker. Such changes can be implemented and memorialized in a written independent contractor agreement.

While on the subject of independent contractor agreements, an essential part of a bona fide restructuring involves a comprehensive review of, and revisions to, the existing independent contractor agreement. Once the corporation has determined how it would restructure its relationship with its independent contractors, the second step is to diagnose whether the corporation’s independent contractors are properly classified.

The third step is re-documenting the independent contractor relationship. This is a comprehensive step, as it should embody the entire relationship between the independent contractors and the corporation. Using a list of the “48 Factors-Plus” will ensure that the re-documentation of the independent contractor relationship is thorough and state-of-the-art.

The final step is implementing the restructuring. The goal here is to ensure that what is set forth in the independent contractor agreement will be implemented in the field and that it does not include empty recitals and misstatements of the relationship, which can provide fodder to class action lawyers and government regulators seeking to challenge worker classification on the basis that the agreement is fraudulent and misleading.

Other steps may include reviewing and revising the corporation’s operating manuals and procedures, documenting the implementation of certain provisions in the independent contractor agreement, and putting safeguards in place to ensure conformity with the restructured relationship with the independent contractors.

b. Re-distribution of Independent Contractors By Use of a Workforce Management or Staffing Company

Where bona fide restructuring is not a practical or viable alternative, another choice is to use a reputable workforce management or staffing company. This option does not completely eliminate all potential liability for misclassification, but the use of a responsible workforce organization can dramatically reduce the risk of such liability as well as the likelihood of a lawsuit challenging the classification of a group of workers paid on a 1099 basis.

It is important to recognize that workforce management and staffing organizations are not payroll companies. What does that mean? When they hire or retain some or all of a company’s independent contractors, they may treat them as either independent contractors or as employees.

If a staffing company treats the workers as independent contractors, then the company will take its own steps to maximize compliance with state and federal tax, workforce, and benefit laws. If the workers are instead treated as employees, then the staffing company will withhold income taxes, make Medicare and Social Security contributions, pay workers’ compensation and unemployment insurance premiums, and can even provide an array of benefits, including health insurance under a plan maintained by the leasing company.

Regardless of the type of organization used, selecting one that is reputable, knowledgeable, and experienced is critical. Otherwise, the workforce solutions or outsourcing company can create even greater exposure to misclassification liability.

One final word of caution. While the use of a knowledgeable and experienced outsourcing company can substantially lessen the risk of future misclassification liability, it is not a panacea or silver-lining. For example, a company that contracts with a leasing workforce management organization may still have to account for the independent contractors or employees it has retained or hired in the company’s benefit plan language and discrimination testing.


The use of independent contractors is still a viable means to supplement a company’s workforce in almost all states, and Congress has never considered a prohibition on the use of independent contractors. All a business is required to do is not misclassify employees as independent contractors. Lax enforcement of the tax and labor laws in the past as they apply to independent contractors has placed most businesses in the position where misclassification liability has become a genuine risk – if steps are not undertaken to reduce or eliminate this exposure using one of the alternatives previously discussed. In light of the current and pending legislative, regulatory, and judicial landscape, there is only one undesirable alternative: inaction.

In accordance with Circular 230 Disclosure

As a former public defender, Michael has defended the poor, the forgotten, and the damned against a gov. that has seemingly unlimited resources to investigate and prosecute crimes. He has spent the last six years cutting his teeth on some of the most serious felony cases, obtaining favorable results for his clients. He knows what it’s like to go toe to toe with the government. In an adversarial environment that is akin to trench warfare, Michael has developed a reputation as a fearless litigator.

Michael graduated from the Thomas M. Cooley Law School. He then earned his LLM in International Tax. Michael’s unique background in tax law puts him into an elite category of criminal defense attorneys who specialize in criminal tax defense. His extensive trial experience and solid grounding in all major areas of taxation make him uniquely qualified to handle any white-collar case.


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