CHAPTER 14

Independent Contractors vs. Employees Statutes

There comes a time in the life of almost every business when it is necessary to get help, be it brain or brawn. The help most commonly needed first is the bookkeeper or accountant who can handle taxes, billing, and the like. When things get a little hectic around the shop or office, the employer might then hire someone to help with the packing or running errands. If selling is necessary for a business, an employer may engage the services of a salesperson or a manufacturer’s representative. If this salesperson is really good, the business will soon have to hire more employees to keep up with the demand.

INDEPENDENT CONTRACTORS

Someone hired on a onetime or job-by-job basis is called an independent contractor. Although paid for their services by the hiring firm or individual, contractors remain their own bosses and may even employ others to actually do the work.

If you occasionally give products to a friend to sell on consignment, the friend is probably an independent contractor. If you hire a bookkeeper or accountant once or twice a year to go over your business records, that person too is an independent contractor. The fact that the person is independent and not your employee means that you do not have to pay Social Security taxes, withhold income taxes, obtain a workers’ compensation policy, or comply with the myriad rules imposed on employers.

More importantly, the employer is generally not liable for injuries to a third party resulting from the independent contractor’s negligence or wrongful acts even while working for the business. However, there are situations where, despite the employer’s innocence, an independent contractor can render a business legally responsible for their wrongful acts. Such situations fall into the following three basic categories:

1. If an employer is careless in hiring an independent contractor and a careful investigation would have disclosed facts to indicate that the contractor was not qualified, the employer may be liable when the independent contractor fails to properly perform the job and a third person is injured.

2. If a job is so dangerous as to be characterized as ultrahazardous or inherently dangerous (both legal terms) and is to be performed for the employer’s benefit, then regardless of who performs the work, the employer will remain legally responsible for any injuries that occur during the performance of the work. A fireworks displayer, for example, cannot escape liability by having fuses lit or rockets aimed by independent contractors.

3. An employer may be required by law to perform certain tasks for the health and safety of the community.

These responsibilities are said to be nondelegable—that is, an employer cannot delegate them and, thus, escape liability for their improper performance. If, therefore, a nondelegable duty is performed by an independent contractor, the employer will remain responsible for any injury that results.

A good example of a nondelegable duty is the law (common in many states) that homeowners and storekeepers are responsible for keeping their sidewalks free of dangerous obstacles. If a homeowner hires an independent contractor to fulfill this obligation by removing ice during the winter, the homeowner is still legally liable if someone is injured on the slippery sidewalk even if the accident resulted from the contractor’s carelessness.

If you are the individual who is hired as an independent contractor, then you should be sure that you will be responsible for your own Social Security taxes, medical insurance, and the like. In fact, you will be considered your own independent business and you must be aware of these obligations when you offer your services.

It is important to distinguish between employees and independent contractors for purposes of liability, obligations, and control. The distinction between these two categories of individuals is not always clear, and there are federal laws, state laws, and court cases that contain tests for determining these distinctions. Perhaps the most important test, which is contained to some extent in the vast majority of laws and cases, is the control test. If the employer is able to control the individual’s conduct, then it is likely that the individual is an employee and not an independent contractor.

A good way to think about this distinction is to consider the difference between having construction on your building performed by a general contractor rather than having a salesperson assist by hammering a nail into a wall for the purpose of hanging a picture. The general contractor is independent and is hired to complete the job contracted for. The salesperson, on the other hand, is an employee and subject to the employer’s control. Similarly, in hair salons, customarily the individuals who work on patrons’ hair are independent contractors who have their own independent business and lease the space they use. Typically, they are not employees of the salon in which they are located. In fact, they set their own schedule, make their own appointments, and are responsible for their own expenses. They may obtain some services from the salon in which they are located other than the space. For example, the rent they pay may include, among other things, a receptionist and a cleaning service.

EMPLOYEES

The second capacity in which someone can work for a business is as an employee. This category includes anyone whose work the employer exercises direct control over—helpers, apprentices, salespeople who represent the business alone, a bookkeeper who is a full-time member of the staff, and so forth. The formation of this relationship entails nothing more than an agreement on the employer’s side to hire someone and an agreement by that person to work. Although a written contract is generally not necessary, it is suggested that employment terms be put down in writing so that there are no misunderstandings later (see Chapter 3 for in-depth discussion of employment contracts).

Liability

Unlike the situation where an independent contractor is hired, a business is vicariously liable for the negligence and, sometimes, even the intentional wrongdoing of an employee when the employee is acting on the business’ behalf. This means that if an employee is on the job and is involved in an automobile accident that is their fault, the business and the employee are both legally liable. An employer would be wise to be extremely careful when hiring and to contact the employer’s insurance agent to obtain sufficient insurance coverage for the additional exposure.

Other Considerations in Hiring

There are other issues a business should consider when hiring an employee, most of which fall into the realm of accounting or bookkeeping responsibilities. An employer should, therefore, consult with an accountant or bookkeeper regarding such items as the following:

• A workers’ compensation policy for employees in the event of on-the-job injury or occupational illness. State laws vary on the minimum number of employees that trigger this very important requirement. The workers’ compensation laws of many states provide that an employer who has failed to obtain or keep in force required workers’ compensation insurance will be strictly liable even in the absence of negligence for on-the-job injury or illness. This includes not only medical expenses, but also damages for pain and suffering, lost earning potential, and other damages that are a consequence of on-the-job injuries or illnesses.

• Withholding taxes (federal, state, and local). Here, too, the laws vary, and an employer must find out what is required in their locale. Employers are required to withhold employees’ federal taxes, and failure to do so will expose the employer to liability for that amount plus interest and penalties.

• Social Security (FICA). There are some exemptions from this body of social legislation. Contact your nearby Social Security office to determine how these exemptions may affect you.

• Unemployment insurance (both federal and state). These also include certain technical requirements for subcontractors and the like.

• Health and safety regulations (both federal and state).

• Municipal taxes for specific programs such as schools or public transportation.

• Employee benefits such as insurance coverage (medical, dental, prepaid legal), retirement benefits, memberships, and parking.

• Union requirements, if you or your employees are subject to union contracts. See Chapter 4 for more information about unions.

• Wage and hour laws (both federal and state). These include minimum wage and overtime requirements. In some states, the law also regulates holidays and vacations, as well as the method of paying employees during employment and upon termination.

As already noted, the requirements of these laws may vary dramatically from state to state. You are well advised to discuss them with your lawyer, accountant, and bookkeeper. In addition, you should find out if any other forms of employment legislation, such as licensing requirements, apply to you, your employees, or your business.

Hazards in the Workplace

While few manufacturers would intentionally injure a fellow human being, you may nevertheless find yourself in an industry or using a process that involves hazardous activities. It is not uncommon to use toxic materials. Employees are often not aware of the potential hazard that may result from the toxic materials. It is essential to research the potentially toxic effects of all substances used in the production process or product you are involved with. Occupational Safety and Health Administration (OSHA) regulations require that all employers with hazardous chemicals in their workplaces provide labels and Safety Data Sheets (SDS) for their exposed workers and train them to handle the chemicals appropriately. (More information on this can be found at the OSHA website at www.osha.gov/SLTC/hazardcommunications/index.html.) In other words, there is a regulatory duty to advise and train employees with respect to hazardous substances in the workplace.

If you are an employee, it is important that you pay attention to the training that is provided to you. Additionally, if you do not receive appropriate training it should be requested.

Congress and federal administrative agencies are active in the field of regulation of hazardous substances. You should also be aware that your state workers’ compensation agency and OSHA may have specific rules regarding your specific type of industry. It is critical to obtain a lawyer’s assistance in determining whether any of these regulations apply to you. Your state’s labor department may also be able to give you information regarding applicable workplace regulations.

If an employment contract is used, a paragraph containing the required disclosure regarding hazardous substances and the employee’s acknowledgment of the known risks should be incorporated in the contract. A similar statement should also be included in any employment handbook. See Chapter 6 for a discussion of employee handbooks.

While these documents would not provide a defense to a workers’ compensation claim, they would sensitize employees to the need for caution in working with the toxic materials. Needless to say, a business should take all precautions possible to protect the health and safety of its employees.

Discrimination

Business owners must comply with numerous antidiscrimination laws, including the Civil Rights Act, the Equal Pay Act, the Age Discrimination in Employment Act (amended by the Older Workers Benefit Protection Act), and the Americans with Disabilities Act. The Equal Employment Opportunity Commission (EEOC) is responsible for enforcement of these laws. Antidiscrimination laws apply not only during the hiring processes but also during the employment itself, including considerations for transfer, promotion, layoff, and termination, as well as job advertisements, recruitment, testing, use of company facilities, training, benefits, and leave. These laws generally prohibit not only intentional discrimination but also practices that have the effect of discrimination. Note that many antidiscrimination laws apply to independent contractors as well as to employees.

These laws make it clear that management may not legally retaliate against employees or job applicants who file discrimination charges against them. If a business is found to have unlawfully discriminated, then that business will likely be liable for lost wages and punitive and other damages, including attorneys’ fees.

Many states, as well as some cities and counties, have also passed laws that reiterate and expand the federal government’s protection against discrimination. These laws are often more protective of employees than the federal law. In addition, some categories not covered by federal law, including those with respect to sexual orientation and gender identity, may be covered by state or local law.

Civil Rights Act

The Civil Rights Act prohibits discrimination based on race, color, religion, sex, or national origin.

With regard to religious discrimination, employers generally may not treat employees or applicants less or more favorably because of their religious beliefs or practices. Employees cannot be forced to participate or not participate in a religious activity as a condition of employment. Employers must reasonably accommodate employees’ sincerely held religious beliefs and permit employees to engage in religious expression if employees are permitted to engage in other personal expressions at work. This law also requires the employer to take steps to prevent religious harassment of their employees, not only by other employees and management but also by vendors and customers.

National-origin discrimination includes discrimination based on foreign accents and English fluency, as well as English-only rules, though there are exceptions if they are necessary for the safe or efficient operation of the business.

Race-based discrimination includes discrimination based on skin color, hair texture, and facial features, as well as harassment and segregation. It also includes discrimination based on a person’s marriage to or association with those of a different race.

The prohibitions against sex-based discrimination encompass pregnancy, birth, and related medical conditions, as well as sexual harassment.

The Equal Pay Act (part of the Fair Labor Standards Act of 1938, as amended) also prohibits sex-based discrimination; it prohibits sex-based wage discrimination among persons in the same establishment who are performing under similar working conditions. Virtually all employers are subject to this act.

More information about the Civil Rights Act and the Equal Pay Act can be obtained at the EEOC’s website, www.eeoc.gov.

Harassment

One of the legal obligations of all business owners is to create a nondiscriminatory work environment. A policy should be established prohibiting any discriminatory language (i.e., ethnic jokes or racial slurs) or other offensive language or activities.

Sexual harassment is one form of illegal discrimination, though harassment based on race and certain other characteristics also violates the Civil Rights Act. There are two basic types of sexual harassment: quid pro quo and that of a hostile environment. Quid pro quo refers to either a harasser asking for sexual favors in exchange for some advantage in the workplace or a harasser penalizing another person for rejecting their sexual advances. A hostile environment, on the other hand, is more generalized in that the harasser creates or permits a hostile work environment through language, activities, and/or conduct.

IN PLAIN ENGLISH

Quid pro quo is Latin for “this for that,” which, in this context, suggests an exchange of sexual favors for some form of employment compensation.

An employer is subject to vicarious liability for a hostile work environment; for example, restaurant management will be responsible for the actions and language of a supervisor that results in an employee’s injury, harm, or damage. If a supervisor has harassed or permitted harassment of an employee, and this situation has led to that employee’s termination, relocation, or the like, the employer will be held liable for the discriminatory sexual actions of its supervisor. To avoid this form of liability, the employer must exercise reasonable care to prevent and promptly correct any harassment behaviors that are reported or otherwise become known to it, and the employee who was harassed must have taken advantage of all preventive programs or policies provided by the employer. There are many training and other resources available to business owners. Check with your business attorney or state employment division.

Many states have anti-harassment policies as well. For example, California requires employers with fifty or more employees to provide certain sexual harassment training and education to supervisory employees. Details of the California sexual harassment laws can be obtained at www.dfeh.ca.gov.

More information on sexual harassment is available at the EEOC website (www.eeoc.gov).

Age Discrimination

Federal age antidiscrimination laws apply to employers of twenty or more employees, as well as to government and union offices. These laws provide that persons forty years old or older may not be discriminated against due to their age in connection with any term, condition, or privilege of employment, including hiring, firing, layoffs, job compensation, benefits, job training, assignments and tasks, and promotions.

More information on age discrimination is available at www.eeoc.gov.

Disabilities Discrimination

The Americans with Disabilities Act (ADA) prohibits discrimination against disabled persons in public accommodations, transportation, telecommunications, and employment. This act applies to those who employ fifteen or more individuals. “An individual with a disability” means a person who has a physical or mental impairment that substantially limits one or more major life activities, has a record of such an impairment, or who is regarded as having such an impairment. A qualified individual with a disability is someone who, with or without reasonable accommodation, can perform the essential functions of the job.

Reasonable accommodation must be made so that that a disabled job applicant or employee can perform the necessary and essential work of the job position. Reasonable accommodations include making existing employee facilities readily accessible to and usable by disabled employees, including the acquisition or modification of equipment or devices, job restructuring, and modifying work schedules.

A business is not required to provide reasonable accommodations if it will result in an undue hardship. “Undue hardship” under the Americans with Disabilities Act refers to an action requiring significant difficulty or expense when considered in light of factors such as the employer’s size and financial resources.

Under the ADA, complex rules apply to medical examinations and inquiries, so a business should contact an attorney for more information if it plan to make such inquiries or require any physical examinations.

For more information concerning the Americans with Disabilities Act, see www.ada.gov. Many states have laws that are comparable to or more restrictive than the ADA. You should check with your business attorney or state employment division to determine whether your state has such legislation.

Zero-Tolerance Policies

A zero-tolerance standard will best protect an employer from discrimination claims. An employee handbook containing policies against sexual harassment, offensive behaviors, and the like is a good starting point. A well-drafted discrimination policy will apply to behavior and oral and written (including electronic) communications. It will include procedures that provide employees with a way to confidentially report problems regarding offensive or harassing behavior and will direct management on how to investigate and resolve the issues. The process should include an employee appeals process for any adverse findings. The complaint and appeals procedures should direct an employee to contact someone other than the employee’s immediate supervisor, because that supervisor may be the one responsible for such conduct.

Employees should be advised that both the complaints and appeals need to be put in writing so that there can be no misunderstandings, though the first step is often verbal. A well-drafted policy will state that the employer will, whenever possible, provide complaining employees and witnesses reasonable confidentiality, but it should be made clear that there can be no assurance of confidentiality, because it may become necessary for management to disclose the identity and testimony of relevant parties in any legal proceeding.

It is also essential for employers to provide employees with ongoing education with respect to employment relations, including harassment and discrimination issues.

The Family Medical Leave Act

The Family and Medical Leave Act of 1993 (FMLA) allows employees to take up to twelve weeks of unpaid leave each year for certain family or medical reasons if they have worked for the employer for a year and meet certain other eligibility requirements. FMLA must be followed by private-sector employers who employ fifty or more employees during the current or preceding calendar year and who are engaged in interstate commerce or any activity affecting commerce.

An eligible employee may take their twelve-week leave due to the birth and care of their newborn, a foster child being placed with the employee, to care for a spouse, child, or parent with a serious health condition, or to take care of the employee’s own serious health condition. FMLA defines “serious health condition” as an illness, injury, impairment, or physical or mental condition that brings about a period of incapacity and/or requires intensive and continual medical treatment, and specifically includes prenatal care.

When the worker returns to the job, the job may be the exact job that the employee left or it may be an equivalent job—with equivalent duties, pay, benefits, and the like. The only employees to which this would not apply are “key” employees whose absence from their positions will cause “substantial and grievous economic injury” to the employer.

There are certain notice requirements, as well as rules for requiring medical certification of the need for leave. Further information can be found at www.dol.gov.

Many states have supplemental leave acts. Check with your business attorney or state employment division.