Employee vs. Independent Contractor Janette Angelica Duran J.D. Candidate Class of 2020 UNM School of Law duranja@law.unm.edu

What’s the Difference? How Do You Tell Who’s Who?

A Basic Definition. Employees Independent Contractors The employer of an employee has the right to control or direct the physical conduct of that employee. The right doesn't need to be used, it is enough that it exists. Independent Contractors The employer of an Independent Contractor only has the right to control or direct the result of the Independent Contractor’s work.

How Can You Tell You’ve Crossed the Line? It isn’t always easy . . .

What is Considered? Behavioral Control Financial Control Type of Relationship

Behavioral Control – What actions can the employer control? Does the employer have the right to control: When and where the work is done, What tools or equipment are used, Where supplies or services are purchased, What specific order or sequence are to be followed in the work? Usually not, for an Independent Contractor. More detailed instructions reflect more control. Is there specific training given by the employer? An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.

Financial Control – Who controls the money? Is the worker paid a regular wage amount for an hourly, weekly, or other period of time? Independent contractors are often paid a flat fee or on a time and materials basis for the job. Does the worker have unreimbursed expenses? Independent contractors often have fixed ongoing costs. Does the worker have any investment in any tools they use to preform their services? Independent contractors usually do. Can the worker make their services available on the market? Independent contractors are generally free to seek out business opportunities in the market and they can make their own profit or loss.

Type of Relationship – Who appears to have the control? (pt. 1) Is there have a written contract that designates Independent Contractor or Employee status? Not definitive, but helpful. Is the business providing the worker with employee-type benefits? Employees often get insurance, a retirement plan, vacation pay, or sick pay. Is the relationship expected to continue indefinitely? Independent contractors are often expected to work on a specific project or for a specific period.

Type of Relationship – Who appears to have the control? (pt. 2) Is the service provided a key aspect of the business? The more central a service is, the more likely it is that the employer has a right to direct and control the worker’s activities. Is there a right to terminate by either party without liability? Generally a worker can be fired or quit at any time, but the Independent Contractor may incur legal liability if he quits and the employer cannot fire the contractor if the contract specifications are met.

Why Does It Matter? Taxes and Other Consequences

Employer’s Tax Responsibilities An employer must generally: withhold federal income taxes, withhold and pay over social security and Medicare taxes, and pay unemployment tax on wages paid to an employee. An employer doesn’t generally have to withhold or pay over any federal taxes on payment to independent contractors. Generally Independent Contractors are responsible for their own self-employment taxes. In New Mexico this will also effect who pays gross receipts tax on services rendered.

Tax Consequences of Misclassification If an employee is misclassified as an independent contractor, the employer will be liable for employment taxes that should have been paid. Income, Social Security and Medicare, Unemployment tax. There can also be criminal penalties if the act was found to be “willful.” Willfulness requires an ”evil motive” or “bad purpose.”

Is There Any Chance of Relief? Employers that have filed their taxes consistently, have consistently labeled their workers as independent contractors, and can provide a reasonable basis for that treatment may be relived of paying additional employment taxes as a result of the misclassification. (IRC Section 503) Liability for the percent of social security and income tax the employer should have withheld for the worker may be limited, if the employer consistently treated the worker as an independent contractor and filed the correct forms. (IRC Section 3509). But there will be no limitation where the employer’s misclassification was intentional. Nor do any limitations apply to the percent of social security that was always the employer’s reasonability or the unemployment tax. The Voluntary Classification Settlement Program offers certain eligible businesses the option to reclassify their workers as employees with partial relief from federal employment taxes.

Other Consequences of Misclassification. Retirement Plans Employer Liability Worker’s Compensation

Qualifications of Benefits Plans Employers who make contributions to their employees’ qualified retirement plans are entitled to make certain deductions based on those contributions. Independent contractors cannot be part of qualified retirement plans. If an independent contractor is incorrectly included, all of employer’s plans the contractor was eligible to participate in may be disqualified. Consequences of disqualification include: disallowance of deductions taken for contributions to the plan, taxation of plan income, taxation of participants in the plan, and loss of tax-favored treatment for distributions from the plan.

Employer Liability for acts of an Employee or an Independent Contractor Generally, an employer is responsible for the physical harm caused by the act of an employee done in the scope of his employment, but not the negligent acts of an Independent Contractor.

Unless . . . In New Mexico specifically, one who employs an independent contractor to do work that the employer should recognize as likely to create a peculiar risk of physical harm to others unless reasonable precautions are taken is liable for physical harm to others caused by an absence of those precautions. In most jurisdictions, the employer may be liable if the work the Independent Contractor is doing is specially, peculiarly, or inherently dangerous.

Worker’s Compensation Independent Contractors generally don’t come within the definition of New Mexico’s Worker’s Compensation Act. The Worker’s Compensation Act provides compensation, in lieu of other forms of liability, for injury or death caused by an accident arising out of and in the course of a person’s employment. If the worker doesn’t fall under the act they are free to seek other remedies proving liability-- like suits at law.

Summery Know Who’s Who.

Know Your Factors. Employees Independent Contractors Behavior: Employers has right to control employees’ behavior. Finance: Employees have little personal financial investment. Relationship: Employees appear very interconnected with the business. Behavior: Employers have right to control Independent Contractors end product. Finance: Independent Contractors have financial investment. Relationship: Independent Contractors appear focused on a specific, sometimes tangential, part of the business.

A Note on Contracts Helpful But Not Determinative

Contracts - The more they clarify the other factors the better. Clearly Identify: the parties involved in the contract, What work is to be preformed, How the worker is getting paid, Who is paying for expenses/ buying equipment, Who is paying the taxes, If the worker can be terminated/ can quit at will, If there will be benefits provided, If they are free to work for others.

Works Cited/Further Reading Lynn P. Hendrix & Willian G. Laughin, Employee V. Independent Contractor: The Distinctions and The Consequences to The Natural Resources Industry, 35 Rocky Mt. Min. L. Inst. 19-1 (1989). Understanding Employment vs. Contractor Designation, I.R.S, FS-2017-09, (July 20,2017), https://www.irs.gov/newsroom/understanding-employee-vs- contractor-designation. Employer’s Supplemental Tax Guide, I.R.S., Pub. No. 15-A, Cat. No. 21453T (Dec. 20, 2018), https://www.irs.gov/pub/irs-pdf/p15a.pdf. Do You Qualify for Relief Under Section 530?, I.R.S., Pub. No. 1976 (Rev. 1- 2017), Cat. No. 22927M (last visited Jun. 13, 2019) https://www.irs.gov/pub/irs-pdf/p1976.pdf. Voluntary Classification Settlement Program (VCSP) can be found at https://www.irs.gov/businesses/small-businesses-self-employed/voluntary- classification-settlement-program To request IRS help in determining an employee’s status use Form SS-8. https://www.irs.gov/forms-pubs/about-form-ss-8