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Employee vs. Independent Contractor Classification

—Nicholas C. Zagotta

It is imperative that businesses classify their workers properly as either employees or independent contractors. The degree of control that a business exerts over workers is the most crucial factor in the fact-specific, case-by-case determination of employee or independent contractor treatment. Unfortunately, no single standard or test exists that can distinguish between employee and independent contractor.

A worker is generally an employee whenever the business has the right to direct and control their work, regardless of whether the business exercises that right. Businesses generally give employees specific instructions or parameters about when, where and how to complete their tasks. These instructions often include what equipment or tools are to be used, which workers may be hired to assist in completing the tasks, where to purchase supplies and services and a timeline of when specific jobs must be completed. When businesses give these types of instructions to a worker make it more likely that the worker will be treated as an employee.

Financial control of the parties’ operations must be considered in making a determination as to status. If the business has a right to direct the financial aspects of the job, the worker is most likely an employee. Other financial aspects to be contemplated include, but are certainly not limited to:

  1. The extent to which the worker has unreimbursed business expenses;
  2. The extent of which the worker’s investment in the facilities or tools used in performing services;
  3. The extent to which the worker makes his or her services available to the relevant market;
  4. The extent to which the worker has the potential to realize a profit or incur a loss; and
  5. How and when the business compensates the worker.

The nature of work is oftentimes significant in defining the relationship between an employer and worker. If and when the worker’s tasks are considered integral to the employer’s business, it is more likely that the individual is an employee. Conversely, temporary and non-integral work combined with no employee-type benefits (insurance, pension plan, vacation pay) may imply independent contractor status.

Business owners need to carefully weigh all of the aforementioned factors, among others, when making a determination as to whether workers should be treated as employees or independent contractors. In the vast majority of cases, the factors will be split which means that simply weighing the factors is not a numerical task. Rather, considering the totality of circumstances in the relationship between the worker and business is necessary. Businesses must be realistic in addressing their right to direct and control workers because while the benefits of an independent contractor classification are great, the negatives of the improper treatment of a worker can be crippling.

Employers and individuals cannot agree or contract to waive the provisions of the Employee Classification Act. Rather, the determination depends on a multitude of factors relating to the work performed. In fact, the Internal Revenue Service has explicitly stated that written contracts between the parties is “probably the least important of the criteria, since what really matters is the nature of the underlying work relationship, not what the parties choose to call it.” In Illinois the penalty for misclassifying a person who should be considered an employee is drastic; up to $1,500 per violation. A separate violation occurs for each person improperly classified and for each day on which the violation continues.

Businesses need to consider all of the above factors in conjunction with other pertinent issues when evaluating whether to treat a worker as an employee or an independent contractor. It is imperative to remain cognizant of the fact that weighing the factors is not a simple numerical task and often the majority of indicators are still not conclusive. The entire relationship as a whole needs to be contemplated in deciding how to classify workers.

Roberts McGivney Zagotta regularly represents both employers and workers in disputes regarding the classification of individuals as either employees or independent contractors.

The information in this article is for informational purposes only and does not constitute formal, legal advice.  Consult with one of the attorneys from Roberts McGivney Zagotta LLC for advice about your particular circumstance.