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Independent contractor or employee? How to make the call

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in Compensation and Benefits,Discrimination and Harassment,Employee Benefits Program,Employment Law,Human Resources

Sometimes, it makes financial sense for companies to engage workers as independent contractors rather than as employees. It can have advantages for workers, too. They sometimes prefer the freedom, status and flexibility of being an independent contractor, not an employee.

But whether a worker is an employee or an independent contractor has nothing to do with the desires of the organization or the worker. Not even a written contract can make someone an independent contractor if that status isn’t legitimate.

The burden is on companies to make sure their workers are properly classified. The worker’s status affects a wide variety of obligations and legal rights under federal and North Carolina laws. 

Among the issues: wages and hours, workers’ compensation, unemployment benefits, company benefits, tax liability and withholding, vicarious liability for worker negligence and protection under North Carolina and federal anti-discrimination laws.

Getting it right 

It’s not always easy to classify workers correctly. 

For example, the IRS has a classification test that considers 20 factors. Under the Employee Retirement Income Security Act (ERISA), the courts apply a common-law agency test. Under the federal Fair Labor Standards Act, the term “employee” is more expansively interpreted to go beyond traditional common-law agency principles.

North Carolina courts have analyzed the standard for determining whether workers are employees or independent contractors (see box below).

Applying the factors 

Several recent North Carolina cases illustrate how courts apply the factors. 

For example, Tony Fele, a nurse who worked for the Nursefinders temporary agency, was driving to a job when he was involved in a traffic accident that killed another motorist. The victim’s estate, arguing that Fele was the employee of Nursefinders, sued the agency.

The agency said it wasn’t liable, contending Fele was an independent contractor because nurses were free to accept or reject assignments. The court wound up agreeing. In reaching its conclusion, the court stated:

While Nursefinders exercised control over extraneous aspects of Fele’s work, such as the dates and times when work was offered and collection of his salary, Nursefinders exercised no control over Fele’s nursing, the function for which hospitals sought him. To the contrary, Fele was a free agent who could and did maintain similar arrangements with other suppliers of medical personnel, and who could and did accept or reject work offered to him through Nursefinders, as suited him. Conversely, Nursefinders could not compel Fele to take any particular assignment. Once Fele accepted work proposed by Nursefinders, Fele was not under any control by Nursefinders while working. Apparently the relationship could be terminated at will by either party at any time.

In another case, a truck driver hauling asphalt injured a motorist in a crash. The victim sued the asphalt company. The evidence showed that the truck driver owned his own truck and controlled how he operated it. Despite this, the court ruled that he was an employee of the asphalt company, making it vicariously liable to the victim. The reason: The truck driver picked up the asphalt at the same location the company’s employees did, received his pay at the same location the employees did, and could be terminated at any time by the asphalt company.

Call your attorney

As those two cases demonstrate, it isn’t simple to determine whether a worker will be classified as an independent contractor or an employee. A contract stating the worker has an independent-contractor relationship with the company and the failure to withhold taxes are not controlling. 

Many workers and companies misclassify the relationship. When that happens, the adverse consequences can be staggering. Consult an employment law attorney before taking on an independent contractor or trying to convert an employee into an independent contractor.

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