Correctly classifying employees and independent contractors is critical to your business. What makes a person an independent contractor rather than an employee is measured, in large part, by the amount of control and direction you have over them.
The classification is important for several reasons. Initially, employers do not pay into the Unemployment Insurance or Workers’ Compensation Fund for independent contractors, but a misclassification affects New York State’s revenue and an individual’s benefits. In addition, the classification is very important in regards to agency law. Agency law is the set of rules that govern when a party may act on behalf of another party. An example is an employer hiring an employee to act on behalf of a company. When an agency relationship exists, the principal (employer) is liable for any liabilities (e.g., negligence or contractual liability) incurred by the agent (employee) in the scope of the employment. In contrast, independent contractors are generally not recognized as authorized under an agency relationship and therefore are liable for their own actions should there be litigation.
There is no black letter law defining who is and who is not an “independent contractor” in New York. Rather, New York courts look to many different common law factors to determine whether there is an employer/employee relationship. While no single factor or group of factors is dispositive, courts have found that combinations of the factors set forth below are indicative of an employment relationship. Generally, the more factors present, the more likely a court will find that there is an employment relationship. Factors that suggest an employee relationship include:
- Requiring the hours of work, attendance at meetings, and permission for absences;
- Instructions given to the individual as to when, where, and how to do their job;
- Direct supervision over the services required and/or performed;
- Providing the individual with the facilities, equipment, tools, or supplies necessary for the performance of the services;
- Setting the rate of pay for service performed without negotiation;
- Compensation in the form of a salary, hourly rate, or a drawing account against future commissions with no requirement for repayment of unearned commissions;
- Reimbursement for business and travel expenses;
- Fringe benefits;
- Providing training to the individual, especially where attendance is mandatory;
- Requiring services to be performed personally by the individual;
- Requiring oral or written reports on services performed;
- Furnishing the individual with business cards or other means that identify the individual as a representative of the employer (e.g., company email address);
- Restricting the individual from performing services for competing businesses;
- Reserving the right to terminate the services on short notice or no notice; and/or
- The nature of the service: unskilled labor is usually supervised, or considered to be subject to supervision.
On the other hand, courts have found the following factors are significant in establishing an independent contractor relationship:
- The individual or the individual’s business offers services directly to the public. For example, the independent business might have media advertising, a commercial telephone listing, business cards, business stationary and billheads, carry business insurance, and maintain a separate business location.
- The individual has a significant investment in facilities and equipment—although hand tools and personal transportation have been found to not qualify as significant;
- Assumption of risk for profit or loss in providing services;
- Freedom to establish hours of work and the scheduling of activities;
- No required attendance at meeting and training sessions;
- No required oral or written reports; and/or
- Freedom to provide services concurrently for other businesses, competitive or non-competitive.
Critical here, courts analyze these relationships on a case-by-case basis. Moreover, the above-referenced factors are not exhaustive as courts may look to many other factors. Significantly, even if a contract expressly states that an individual is an independent contractor, courts regularly disregard that language and look to whether the factors above are present. That is why avoiding the pitfalls discussed in this post are critical to prevent your independent contractors from being misclassified as employees.
If you have any questions regarding independent contractors, employees or consulting agreements, or other questions about operating your business, contact Matthew Wagoner at email@example.com or (518) 400-0955 for a free consultation.