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 Independent Contractor vs. Employee

Small Business Insurance
Independent Contractor vs. Employee

Compiled By Dana J. Coates

Employer Liability for Work Related Injuries of an Independent Contractor

Dana Coates, President TSBIC.comA cosmetologist designated as an independent contractor by written agreement, injured his back lifting a 5-gallon water bottle and his employer was ordered to pay workers' compensation benefits. In California, an actor who obtained a stunt man to fall off of a horse was found liable for benefits for the stunt man's injuries because the actor dictated what type of fall to make. A circus clown and trapeze artist were both found to be employees because without them there would be no circus. A food salesman was killed in a car accident after attending a dinner meeting and his family collected benefits. A carpenter hired to help remodel a garage was found to be an employee of an unsuspecting homeowner. Still in another case, in New Jersey a court decided that an insurance sales staff is the employee of the insurance company employer despite the contractual designation as independent contractors, their professional autonomy and the highly independent nature of their work.

All of these plaintiffs had one thing in common - their employers considered them to be independent contractors. Whether there was a contract or not, the courts disagreed with their designation and ordered payment of workers' compensation benefits. This area of law is difficult to navigate and employers must beware. Liability for injuries to those designated as independent contractors is extremely common, most often unintentional and almost always very costly.

Employee vs. Independent Contractor

Since the distinction between employee and an independent contractor can mean the difference between liability for on-the-job injuries and not, it's important to try to understand some of the distinctions the courts make. The term employee means every person in the service of another under any contract of hire, express or implied. In other words, an employee is a person employed to perform services for someone else, a person who is subject to the other's control or right to control. The court makes these determinations using factors from two tests, the control and the nature of the work tests, which are derived from the law of agency.

Factors the Court Considers

In determining the true nature of an employment relationship, the courts will examine how much control the employer has over the worker. In particular, courts assess who controls the details of the work; who sets the hours, is the worker supervised, who furnishes the equipment to get the job done, location, method of payment and length of time the worker is employed. The court will also try to determine whether or not the worker is engaged in a distinct occupation or business, or if the work is part of the "regular business" of the employer like the insurance sales staff mentioned above, and whether the parties believe they are in an employee-employer relationship.

Here is an illustration

Let us begin with a typical illustration: the status of a person baking birthday cakes. Such a person may be a young woman who bakes all day from eight until five, with an hour for lunch, at seven dollars an hour. She works in a large factory room where hundreds of others do the same kind of work with supervisors hovering about. By contrast, suppose that you place an order with a female baker whose ad you saw in the local paper. You want her to bake you a special cake for your dog Jeb's birthday with certain writings, a picture of your other dog, Newt, playing with your son Joe, and chewing on a bone.

You will be allowed, of course, to express a preference for the shape or height of the cake and some decoration details. You will likely be told to come back in so many days to pick up the cake. Meanwhile, you have nothing to say about what the baker does. If you offered to pay her by the hour she would be incredulous; if you told her you wanted to stand at her shoulder and supervise the baking and decorating of the cake, she would be affronted; and if you forbade her to take more than an hour lunch break she would throw the cake at your face and throw you out the door.

The woman baking in the factory is clearly an employee. The woman from the ad is clearly not an employee and what is more, she does not want to be an employee.

Now let us start varying these two clear extremes, making the bakery worker more independent and the woman from the ad less independent; and we shall soon reach the mysterious abyss where most of the legal skirmishing takes place.

The Control Test Factors

In practice, the right to control the details of the work is considered the "primary test" courts use to determine compensation liability. An employer does have the right to control the quality or description of the work he wants completed by someone he contracts with. However, when the level or nature of the control seeps into control of the actual person doing the job, the scales may tip in favor of actual employee status.

One factor the courts will consider is who supplies the tools or equipment to get the work done. When the employer furnishes valuable equipment, the relationship is almost never deemed as independent contractor status. Payment by a unit of time, such as by hour, day or week, is strong evidence of employment status. While payment on a completed project basis does indicate independent contractor status, it is not alone definitive. Payment on a commission basis might indicate either, although if there is continuing service, it probably indicates employee status.

The right to fire is very important. The right to end the employment relationship without liability also indicates employee status because it leaves an employee without any recourse. An independent contractor on the other hand, has a legal right to complete the job or to sue for breach of contract.

Relative Nature of the Work Test

There is a trend in the courts to look beyond control factors to the employment relationship as it relates to the core of the employer's business. Since the theory of compensation law is that the cost of on-the-job injuries should be borne by the consumer as part of the cost of the product, whether the product is basketball tickets, a hair dryer or the services of an investment banker, the courts need to determine if a worker's service amounts to a distinct and separate business or whether the worker is performing an integral function for the business.

Recall, if you will, the case involving the insurance sales staff mentioned above. In that case the sales staff was contracted to freely exercise their own discretion and judgment with respect to soliciting clients. Payment was by commission, not by time. They paid their own expenses and used their own cars.

Although the company set the territories, supervision was non-existent. They were not required to account for their time or to attend any meetings. They did not have office space and the written contract expressly designated independent contractor status. Since the employer exercised little or no control over their sales staff, all control test factors pointed to independent contractor, but the court disagreed and instead, focused on the nature of their work.

Here the sales staff was not engaged in a distinct business; they were in the continuous, exclusive and integral service of the insurance company to sell policies for them. Without them, the insurance company would not exist and the court ordered the employer to calculate their workers' compensation benefits and write the check. A New Jersey case involving real estate agents was decided similarly. Remember the circus clown and trapeze artist? The courts in that case decided that a circus wouldn't be a circus without them, and as such categorized them as employees, making the employers liable for workers' compensation benefits.

Liability for Spouse, Child or Volunteer

Historically spouses in contractual relationships with their husbands or wives who were injured on the job were barred from collecting workers' compensation benefits. However in the interests of justice, this rule is rarely enforced in the courts today. In a parent-child scenario, the outstanding issue before the court is to determine if there is a true contract or if the services being provided are informal or irregular. In the true contract situation, workers' compensation is available, in the latter, probably not.

Volunteers present more complicated situations. In general, if the volunteer is not paid, they are not an employee for the purposes of workers' compensation. Still, what if you "hire" a volunteer to deliver meals to the homeless on street corners and you make a donation in his name? As long as you pay that donation, it is a form of payment sufficient for a court to attribute employee status to your "volunteer." If you ask your friend, the comedian, to volunteer as host of a charitable fundraiser for your organization, he is not an employee. If your son helps you at the office for a couple hours a week, he will probably not be deemed an employee. Nevertheless, if you engage someone who owes you money to work for you in order to discharge his debt, the courts are tending to view that as payment and you may be liable for workers' compensation benefits in event of an injury.

Concluding Remarks

There are many scenarios that can trip up the unwary employer including those who hire temporary staff, lend employees or who engage in dual employment relationships. You can find yourself liable for huge workers' compensation benefits if you hire the wrong type of people. The best way to avoid such pitfalls is to consult your attorney or insurance broker. An experienced attorney or insurance broker can help! To find out how an insurance broker can help you in this particular area, and streamline your employee administration, please visit www.tsbic.com or contact us here.

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