Independent Contractors: The Employer’s Way to Have an Un-committed Relationship By: Michael L. Elkins, esq.

In these uncertain economic times, employers are increasingly looking for ways to hire employees without the burden of having to maintain the employer/employee relationship for an extended period of time. Much as the divorce rate soars during periods of financial crisis, so to does the rise of employers “cheating” on their employees with, dare I say it, independent contractors. In theory, the independent contractor is akin to an un-committed, non-monogamous relationship.

Independent contractors are usually there to serve a very specific purpose, are allowed to be with several different employers, and are generally able to come and go as they please. All this should make for a nice and easy relationship benefiting all parties. Nonetheless, as with most un-committed relationships, the independent contractor relationship can become complicated, and often times a trap for the un-wary employer. When engaging independent contractors, it is essential that the employer follow several basic principles to make sure that the independent contractor is, and remains, truly “independent”, and does not become an employee. Most state courts have articulated several tests to determine whether an individual is truly an independent contractor. The foregoing is some of the general principles that most likely apply in each state. Of course, the analysis will vary from state to state and employers should always consult local labor and employment counsel before hiring an independent contractor.

First, all independent contractor relationships should be memorialized in writing in what should be titled an “Independent Contractor Agreement”. The agreement should state very clearly, and unambiguously that the person who is performing work is an independent contractor and not an employee. Additionally, the agreement should state the exact job that the person is to perform.

Second, the independent contractor should always remain free to take on work from other employers. In fact, this type of activity should be encouraged. In the agreement, the parties should state in writing that the independent contractor’s main source of income is not from the employer, that the independent contractor is free to pursue other employment simultaneous with the current employment and that the employer encourages him to do so. This type of language, and practice, will alleviate any claim that the employer was in actuality the main source of income and that the independent contractor was not independent at all.

Third, while the employer can designate the particular result they want from the independent contractor, they should designate how that result is achieved. The independent contractor should be free to make his/her own schedule and should never be required to show up at a certain time and leave at a certain time. The employer may, of course, designate a particular completion date, and may also provide general guidelines for completion of the scheduled assignment. Nonetheless, as a general matter the independent contractor should maintain ultimate control of their own schedule and method by which they complete the assignment.

Fourth, the independent contractor should be compensated as a 1099 employee, meaning that the employer should not be taking deductions from the independent contractor’s pay. It has become urban legend that, by simply paying an individual as a 1099, they automatically become an independent contractor. This is wrong, and can lead to serious consequences. Paying an individual as a 1099 is merely one factor in determining whether they are an independent contractor. If an employee is being paid as a 1099, and he/she is not truly an independent contractor, then the employer may be subject to fines and penalties from the IRS, and will be responsible for all back employment taxes. Additionally, the employer may be subject to wage and hour litigation for failing to pay the employee the appropriate amount of overtime. Thus, it is important that employers do not simply pay employees as 1099s in the hopes that this alone will make the employee an independent contractor.

Employers should be aware that the miss-classification of an employee can have serious consequences. In order to avoid tax liability, always make sure to have the independent contractor agreement ready to provide the IRS, in the event there is ever a questions as to the status of an employee. The written agreement will provide strong evidence of the parties’ intention to enter into an independent contractor relationship as opposed to a traditional employer/employee relationship. Additionally, always make sure that the method of payment, and amount pay for work performed is agreed upon before-hand. This should be part of the independent contractor agreement and will help in avoiding lawsuits for overtime compensation. While there is no requirement to pay an independent contractor overtime, if the person was improperly classified as an independent contractor, the employer may have to pay overtime compensation (assuming the person is a non-exempt employee). Proceeding with caution is the key.

Employers can save an extensive amount of money by utilizing independent contractors. That said, an employer who does not properly classify an individual could end up paying more in the long-run. When in doubt, employers should consult local labor and employment counsel to determine their individual state’s requirements and always explain the nature of the position for which they want to classify as an independent contractor.


About the author: About the Author: Michael Elkins is a shareholder with Fowler White Burnett in the Miami office. He focuses his practice on labor and employment law and has represented a wide range of clients, from small business owners, to large corporations, to local municipalities. Michael can be reached at melkins@fowler-white.com or (305) 789-9200.