Employees vs. Independent Contractors: Can You Identify the Legal Differences?
02 Jun 2015
Often times business owners make decisions based on economic factors, which can be a sound basis; however, there are times when various federal or state laws take precedence over economics and must guide the business owners’ decisions. The decision as to whether an individual performing work for your chiropractic practice should be classified as an employee or an independent contractor is one such example. Although there can be sound economic reasons for classifying an individual as an independent contractor instead of an employee, business owners do not have the freedom to make this choice. Indeed, not even the individual who is performing the work can “make the choice.” Rather, federal and state laws have clearly articulated tests which must be followed in making the determination as to whether someone legally can be classified as an independent contractor. If the factors outlined in various statutes and regulations cannot be established to demonstrate an independent contractor relationship, then the individual must be classified as an employee. Generally speaking, if there is any doubt, business owners should classify the individual as an employee and avoid the risk associated with misclassification.
Since the economic downturn in 2008, we have seen a significant increase in audits of businesses by the U.S. Department of Labor (“DOL”) and the Colorado Department of Labor (“CDLE”) designed to target this specific issue. Their motivation is to ensure that individuals are receiving and paying necessary payroll taxes, and getting unemployment insurance and workers’ compensation insurance. The DOL and CDLE also have identified certain industries that it views as being non-compliant or that have special rules that can be difficult to interpret, and they are targeting these industries for audits. Indeed, we have noticed in uptick in audits of childcare centers, fire departments, home health care companies, restaurants, spas, massage therapy businesses and, yes, those in the medical profession.
The good news is that this is one area where a business can be proactive and conduct a self-assessment of the individuals it has classified as independent contractors and make corrections where necessary.
The Fair Labor Standards Act (FLSA), Internal Revenue Code, the Colorado Employment Security Act and the Federal Unemployment Tax Act all outline different tests and factors that a business should consider in making this determination. In addition, courts that have heard this issue over the years have developed their own common law tests and criteria. When put all together, the usual factors to consider are does the business:
- Have the right to control the details of the work;
- furnish tools and the workplace space;
- withhold taxes, workers’ compensation and unemployment insurance funds;
- the right to discharge the individual; and
- dictate the permanency of the relationship.
See Chin v. United States, 57 F.3d 722, 725 (9th Cir. 1995) However, the “right to control” has been deemed the fundamental test by many courts addressing this issue. In addition, the FLSA and the Internal Revenue Code focus on the “economic realities test.” The 10th Circuit Court of Appeals, which includes Colorado, has identified the following as the factors as part of the “economic realities test”:
- degree of control exerted by the employer over the worker;
- worker’s opportunity for profit or loss;
- worker’s investment in the business;
- permanence of the working relationship;
- degree of skill required to perform the work; and
- extent to which the work is an integral part of the alleged employer’s business;
See Baker v. Flint Eng’g & Const. Co., 137 F.3d1436, 1441 (10th Cir. 1998). However, the key inquiry is whether the worker is economically dependent on the business to which he renders service…or is, as a matter of economic fact, in business for himself. There is no “one size fits all” approach, and the job title itself is insignificant. For example, just because a massage therapist is classified as an independent contractor for one practice, does not mean that this massage therapist is not an employee at another practice. The statutes and case law require thoughtful and individualized analysis of each position. Failure to do so can be quite costly. If your business misclassifies an individual as an independent contractor who is later determined to be an employee, you could be subject to payment of back wages, back taxes, penalties and interest, on top of attorney or accountant fees that may be necessary to address the situation. Thoughtful analysis of the various individuals your practice hires as an independent contractor can save you time, energy and attorneys’ fees.
Michelle B. Ferguson, an employment lawyer at Ireland Stapleton Pryor & Pascoe, PC, focuses on “preventative employment law.” Michelle works with private and public employers to be proactive in identifying and solving issues before an employment claim is filed. She also provides training to employers and their employees on all matters of employment law. If you would like more information or legal advice specific to your practice, contact Michelle B. Ferguson at firstname.lastname@example.org. What is written here is intended as general information, and is not to be construed as legal advice. If legal advice is needed, you should consult a lawyer.