Excerpted from Tennessee Employment Law Letter written by attorneys at the law firm of Miller and Martin.

It's not uncommon to see an employer use the term "contractor employee" or "contract employee" to describe a person who is working for the company. Ordinarily, that means -- at least to the employer using the term -- that the person is being treated as an "independent contractor" rather than an "employee."

In other words, taxes aren't withheld, and the person isn't eligible for health insurance and other employee benefits. Both the employer and the "contractor employee" may even sign a contract saying that the person in question isn't an employee but an independent contractor.


The problem? It's a bunch of bunk
Why? More times than not, the "contractor employee" is doing work being done by other individuals who are treated as full-fledged employees.

The person may be working right alongside the other employees. She puts in an eight-hour day just like everyone else. She doesn't work for any other company. The result? She's an employee, and if you're her employer, you're violating the law.

A real independent contractor -- or "contractor employee" if you prefer -- is someone like a plumber, a house painter, an electrician, and so on.

In other words, an independent contractor works for a lot of different people. He gets paid for one job and moves on to another. He controls the number of hours he works. He has his own tools and equipment. He has his own employees who help him do the work he has been hired to do.

If you treat an employee as an independent contractor, you aren't paying unemployment taxes. You aren't withholding from the misclassified person's compensation income taxes, social security, and Medicare taxes.

And the IRS will be quick to tell you that if you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that person, plus a penalty.

What if you're paying the so-called "contractor employee" a flat fee in accordance with a contract? This can be a problem if the person is really an employee, is really a nonexempt employee, has been working a lot of hours, and should've been paid a lot of overtime.

This can really be problematic if you have a lot of "contractor employees" who've been working a lot of overtime for months or perhaps years. You may very well owe the workers a lot of money.

Note that we're not talking about a situation in which you have contracted with a temporary agency to provide temporary employees for your business.

In that case, you may very well pay the agency a flat fee for each employee, and the agency is responsible for paying the employee in a proper manner -- which means that it will withhold taxes and so on.

That's perfectly OK. What we're talking about is a situation in which you directly hire a "contractor employee" or maybe many of them to work for you on a full-time basis. You may call them independent contractors or contractor employees, but they're employees — period.

Some of you may very well be referring at this point to something mentioned earlier in this article: Wait a minute. I have a written contract that says my company and the worker agree that he's an "independent contractor."

It doesn't matter, however, if the facts and circumstances show that he's really an employee. He's working for you full-time. He does work like other real employees are doing. You tell him what to do. You set his hours. In other words, he looks like a duck, walks like a duck, and quacks like a duck.

Also, note that there is such a thing as a "statutory employee," who occupies a sort of middle ground between independent contractors and regular employees.

They are workers in certain occupations who wouldn't be considered employees under the usual rules -- like full-time life insurance sales reps, agent drivers, commission drivers, traveling sales reps, and home workers whose jobs are done on a piecework basis.

Even if a worker falls within the category of statutory employee, his employer must still withhold social security from his compensation.

If you have a lot of contractor employees or independent contractors doing work for your company, it's probably a good idea to sit down with your labor and employment counsel and make sure you're not in violation of the law. You also may want to get some advice from your tax counsel.

It's not uncommon for people to believe that some myths are true. If you believe in the myth of the "contractor employee," you may be subjecting your company to a lot of liability on the labor and employment and tax fronts.

Copyright 2007 M. Lee Smith Publishers LLC. TENNESSEE EMPLOYMENT LAW LETTER. TENNESSEE EMPLOYMENT LAW LETTER does not attempt to offer solutions to individual problems but to provide information about current developments in Tennessee employment law. Questions about individual problems should be addressed to the attorney of your choice.