Do You Have an Independent Contractor or Employee?

03.29.2016
HR & Safety

It’s not uncommon for companies of all sizes to use independent contractors as a way to perform work requiring expertise or skills that a company’s permanent workforce may not have.
It’s also not uncommon for employers to mistakenly classify someone as an independent contractor who fails to meet the criteria under Connecticut and federal law.

Miguel Escalera is a partner at the labor and employment law firm Kainen, Escalera & McHale in Hartford.

About the author: Miguel Escalera is a partner at the labor and employment law firm Kainen, Escalera & McHale in Hartford.

Why does it matter?
Put simply, a failure to properly classify a worker as an employee comes with substantial penalties, including liability for:

  • Payroll taxes and possible penalties
  • Claims of employment discrimination or wrongful discharge
  • Workers’ compensation or unemployment compensation claims
  • Denial of participation in employee benefit plans, including retirement plans, profit-sharing, health insurance, and COBRA
  • Overtime claims under state or federal wage and hour laws

So what’s the difference between an employee and an independent contractor?
There’s no simple answer, particularly since several state and federal agencies—for example, the state departments of Labor and Revenue Services, the Connecticut Workers’ Compensation Commission, the IRS, and the U.S. Department of Labor—all have their own rules and tests governing this area of employment law.
Consequently, compliance with one standard does not necessarily mean compliance with another.

State Law

Under Connecticut law, the “fundamental distinction between an employee and an independent contractor depends upon the existence or nonexistence of the right to control the means and methods of work.”
What does that mean?

Failure to properly classify a worker as an employee comes with substantial penalties.

Many factors are considered when determining whether an employer has the right of control over the individual, and no one factor predominates.
Rather, the assessment is made on an individual basis, and the outcome may vary from one situation to another.
However, if the evidence demonstrates that the employer: (a) retains the right to discharge, (b) pays the employee at an hourly or salaried rate, (C) establishes the hours to be worked, (d) furnishes the necessary equipment or materials for the job, and (e) monitors the individual’s work and retains the right to take corrective measures if performance is unsatisfactory, the individual will likely be deemed an employee, not an independent contractor.

Federal Law

The federal Fair Labor Standards Act offers further guidance: “Workers who are economically dependent on the business of the employer, regardless of skill level, are considered to be employees, and most workers are employees. On the other hand, independent contractors are workers with economic independence who are in business for themselves.”

Compliance with one standard does not necessarily mean compliance with another.

Interestingly—the first debates on this topic followed the enactment of the Social Security Act of 1935, and early efforts to collect employer taxes to cover the expense of what were then called “old age benefits.”
To collect fairly, the government needed to devise a way to distinguish between employees for whom employers were required to pay a Social Security tax and independent workers.

Resources

For additional guidance, the IRS has for a long time relied on a 20-factor test—more recently supplemented by the economic dependence concepts referenced above—to determine whether an individual is an employee or an independent contractor.
Labor and employment law firm Kainen, Escalera, & McHale include the 20-factor test in their free employer's guide to distinguishing independent contractors from employees.
The Connecticut DOL's Joint Enforcement Commission on Employee Misclassification provides a variety of online resources, including answers to FAQs and various forms for employers.
The site also makes available a complaint form that can be filed by workers questioning their contractor status or businesses that suspect an unscrupulous competitor of misclassifying workers to gain unfair advantage by not paying required taxes.
 

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