Independent Contractors V. Employees: Who Is Which, and Why Does It Matter?

An issue that has become the increasing focus of state and federal cases and legislation is how to know if you are hiring an employee versus contracting with an independent contractor. While classifying someone as a contractor is seemingly cheaper and easier than dealing with payroll taxes and workers' compensation insurance, state and federal government penalties are huge if you get it wrong. Enforcement actions are soaring both in California and nation-wide. Many small or budding businesses (including law firms) are ruined over misclassification mistakes. Therefore, any time you are paying money to someone for a service, it is worth considering whether you are classifying that person appropriately.

What are the differences between a contractor and an employee? If someone has a specialized skill over which you exert very little control (for most people, a good example would be a carpenter, a computer guru, an accountant, etc.), they are likely a contractor. Consider whether this individual works in a specialized field that is not your area of expertise. If he does, it becomes difficult to exercise control over how he does his job. Since most state and federal agencies hold that the payer's ability to control the work done for him is the single biggest factor in determining whether someone is a contractor or an employee, answering the above question allows you to discern a contractor from an employee.

Another factor to consider is whether the person's expertise is something that operates as a support to your home or office, or entirely independent of your home or office. For example, the person who comes to paint your law office is performing a duty totally unrelated to your area of expertise, supporting contractor status. While you might be able to pick up a paintbrush and help (i.e. the work is arguably not as skilled as a computer guru), you most likely could not effectively micromanage the painting project. Contrast this with the person who comes in to offer secretarial support in your law office. The secretary's work is an integral part of your operations and also something over which you can exert a large amount of control. The average lawyer, for example, often proofs the work of her secretary and might make all kinds of changes to it. These kinds of actions show an employer-employee relationship.

You likely would have more success arguing that a contracting attorney you use for your law practice is an independent contractor, but be careful not to micromanage their work too much. Also, take into account whether that person carries their own malpractice insurance, holds herself out as a business (for example, under the auspices of a solo law office), and whether she has some expertise outside of yours. All those things point to contractor status.

How you pay someone, whether by the job or by the hour, is another crucial difference between contractors and employees. For example, you pay a secretary by the hour (supporting employee status), while you pay a painter for his completed work (supporting contractor status). In addition, the longer the relationship between payer and payee, the more likely courts or administrative agencies are to find employee status.

Finally, consider whether your service provider has many clients or just a few. If the person works just for you, she is more likely to be your employee. If she has many clients and holds herself out as a business, she is likely a contractor.

What else can you do to avoid being penalized for misclassifying a service provider?

• Draw up a document that supports contractor status if that's the way you choose to go.
• Keep a vendor file indicating contractor status (include ads placed by the contractor, proof of her insurance, and other indicia of the individual holding herself out as a business).
• Get educated on the topic to have a thorough grasp of how black, white, or gray your particular contractor v. employee situation is. Remember that a number of factors go into the legal analysis.