By Wendy J. Baker
I represent several small companies that have minimal profit margins (who doesn't?). The owners of these companies believe with all sincerity that they cannot afford to pay for unemployment compensation insurance or other benefits to which employees are typically entitled. They have managed to stay in business by creatively hiring independent contractors to perform duties or services on behalf of their companies.
Unfortunately, most of these companies have become my clients because the state or federal government suspects that these independent contractors are actually employees. If the company has wrongly classified their workers, the result can be hefty back payments and fines for the company.
As independent contractors, workers are not entitled to unemployment, retirement and health benefits offered through the hiring company. Nor are they entitled to many of the protections afforded employees through various federal and state laws such as medical leave, workers' compensation and overtime wages. Consequently, federal and state governments like to scrutinize the way workers are classified, and they love to nail companies who hire workers who don't meet the criteria for independent contractors.
The challenge to companies is big because the Internal Revenue Service, the Oregon Employment Department, the Oregon Workers' Compensation Division and the Bureau of Labor and Industries all have somewhat different requirements for qualifying as an independent contractor. Because determining a worker's status is very fact specific, you should contact an attorney if you have questions about a particular person.
In the way of some overall guidance, here are two threshold questions to ask:
- Do you pay your regular employees to perform essentially the same duties as the worker who is being treated as in independent contractor?
- Has the same worker previously been employed by the company to do essentially the same task?
If the answer to either of these questions is yes, the worker in question very likely is an employee.
Keep in mind that the key issue is how much control the hiring company has over the worker. Here are some factors that indicate that the worker is an employee rather than an independent contractor:
- The worker devotes substantially fulltime to the company's business;
- The company furnishes significant tools, materials, equipment or office space;
- The worker cannot realize a profit beyond an ordinary salary;
- The worker is paid on an hourly, weekly or monthly basis instead of at the completion of a job;
- The worker has the right to end his or her relationship with the company without incurring liability.
- The company sets the workers' hours and gives instructions about when, where and how to perform the work;
- The worker renders a service that is critical to the company's business;
- The company trains the worker.
If the following factors are in play, then the worker is more likely an independent contractor:
- The worker performs services for more than one company at a time;
- The worker advertises his or her services to the general public on a regular basis;
- The worker has a significant investment in his or her own licenses, equipment, marketing;
- The worker has the option of hiring others to perform the actual services for the company;
- The worker hires, supervises and pays assistants from the worker's own pocket;
- The worker carries his or her own liability insurance.
None of these factors alone is determinative of the workers' status, which is why it makes sense to ask for help from a professional if you have any concerns.
Time and again I am asked this question: If the company has misclassified the worker, should we change his or her status or stay the course and see if anyone notices? My advice is to be pro-active. If you think you've made a mistake, don't wait for the Department of Labor or the Oregon Employment Department to show up for a surprise audit. You will fare much better if you show good faith and try to correct the problem.
Wendy Baker is a licensed Oregon attorney who specializes in employer-side labor and employment matters, including day-to-day advice and defense of discrimination, retaliation and wage-and-hour claims. She can be reached at 541-345-0753 or at wendy.baker@employerlaw.org. Her office is located at 100 West 13th Avenue, Suite 200, in Eugene. For more information on her practice or to access helpful employment law information, go to www.employerlaw.org.
