Employee or Independent Contractor?

By R. Kevin Davis, Esq.

It seems inevitable that in the practice of employment law you will come across a client that seeks to utilize the services of an independent contractor in his or her operations. These business owners must be careful to ensure that such workers truly are independent contractors or else they invite a whole range of problems, particularly related to federal wage and hour laws, federal tax laws, and state law issues such as workers’ compensation.

Some business owners mistakenly believe that if they simply call their workers “independent contractors” that those workers are not employees of the company. These businesses may not be paying these workers an amount equal to the federal minimum wage, or overtime pay, and they may not be making any income tax withholdings or FICA contributions, or keeping records related to their work. Likewise, these businesses may not be covering these workers on the company’s workers’ compensation insurance plan. These are things that a business may generally be required to do for its “employees”. Thus, it is extremely important for businesses to ensure that such workers really are independent contractors and not actually employees of the company.

When it comes to a wage and hour analysis under federal law, there is no single factor that will determine the status of a worker as an independent contractor. Under an analysis of Alabama law the courts will look to determine if the business has a reserved right of control over the worker. This is not necessarily focused on control over what work the worker will perform for the business, but how the work is to be performed. Under Alabama law the courts can consider the existence of an independent contractor agreement as a factor in determining the true nature of the parties’ relationship. Nevertheless, what the parties call themselves is not determinative of the issue and is not as important as how the parties interact in practice.

Under a federal wage and hour analysis the court will look at many factors in addition to a reserved right of control in determining whether the worker is truly an independent contractor or an employee of the business. For instance, one factor may be whether the type of work the worker is performing is something that is integral to the business. In other words, if the business is a brick laying company and the workers that the company calls “independent contractors” are laying bricks for the company then they are performing work that would appear to be integral to the company.  Workers performing jobs that are integral to the company’s offered services appear less like independent contractors and more like employees.  Another factor may be whether the workers exercise any managerial skills that affect their opportunity for profit or loss. Are they free to turn down work, hire or fire assistants, supervise others, or pay other workers out of their own pocket? If so, they appear more like independent contractors. If not, they appear more like employees. In addition, do the workers have investments that indicate they have their own company? A true independent contractor would usually be in business for himself or herself. As such, does he or she provide their own tools, equipment, insurance, etc.? If the worker does not appear to have any “skin in the game”, so to speak, then they appear less like an independent contractor and more like an employee.

Analyzing a worker’s status is necessarily a case by case endeavor that is dependent upon the unique circumstances associated with that worker.  The above factors are just some of the things that should be considered in determining whether a true independent contractor relationship exists.  Businesses should always be careful to make sure they are in compliance with state and federal employment law.  If your business has employees verify that you are paying a minimum wage, overtime pay, making applicable withholdings, and making FICA contributions when required to do so.  An experienced business and employment lawyer can help you analyze your company’s employment situation and assist you with compliance.  When in doubt, turn to a professional for help.