Independent contracting in the United States

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An independent contractor is a person, business, or corporation that provides goods or services under a written contract or a verbal agreement. Unlike employees, independent contractors do not work regularly for an employer but work as required, when they may be subject to law of agency. Independent contractors are usually paid on a freelance basis. Contractors often work through a limited company or franchise, which they themselves own, or may work through an umbrella company.

Contents

In the United States, any company or organization engaged in a trade or business that pays more than $600 to an independent contractor in one year is required to report this to the Internal Revenue Service (IRS) as well as to the contractor, using Form 1099-NEC. This form includes the money paid, contractor's name, social security number, address, phone number, and an indicator about the existence of foreign bank accounts; independent contractors do not have income taxes withheld like employees. The form has also led to use of the phrase "1099 workers" or "the 1099 economy" to refer to the independent contractors themselves. [1]

Versus employee

The distinction between independent contractor and employee is an important one in the United States, as the costs for business owners to maintain employees are significantly higher than the costs associated with hiring independent contractors, due to federal and state requirements for employers to pay FICA (Social Security and Medicare taxes) and unemployment taxes on received income for employees. [2] Likewise, employees are protected from being fired without cause, and if fired or let go for other reasons are entitled to unemployment benefits, whereas independent contractors have neither protection nor entitlement. Employees are also entitled to receive overtime pay for work performed over the 40-hour-per-week standard, whereas independent contractors may work any number of hours (including far above this standard) with no change in pay.

In the early 1990s, the IRS methodically began to look for employers who were misclassifying employees as independent contractors, and has since obtained billions of dollars in Social Security back taxes. [2] Recently, worker classification initiatives have been a top priority for the IRS, the Department of Labor, and state agencies. In 2011, the IRS and the Department of Labor entered into a memorandum of understanding in an effort to jointly increase worker misclassification audits. [3]

The United States Supreme Court has offered the following guidelines to distinguish employees from independent contractors:

  1. The extent to which services are integral to the employer's business. Greater integration favors an employee-employer relationship.
  2. The permanence of the relationship. More established relationships favor employee status.
  3. The amount of investment in equipment. When a worker makes a significant investment in the equipment they use in working for someone else, this suggests an independent contractor relationship.
  4. The degree of control by the principal. More control favors employee-employer status.
  5. The amount of financial risk. More opportunity for profit or loss favors an independent contractor relationship.
  6. The amount of initiative, judgment or foresight in open-market competition with others required for the success of the claimed independent enterprise. Entrepreneurial and distinctive work favors an independent contractor relationship. [4]

The IRS, for federal income tax, applies a "right to control test" which considers the nature of the working relationship. [5] They highlight three general aspects of the employment arrangement:

  1. financial control
  2. behavioral control
  3. relationship between the parties

In general, their criteria parallel those of the Supreme Court in sentiment. They include guidelines such as the amount of instruction, training, integration, use of assistants, length of professional relationship, regularity of work, location of work, payment schedule, source of funds for business expenditures, right to quit, and financial risk more typically seen with each work category. In their framework, independent contractors retain control over schedule and hours worked, jobs accepted, and performance monitoring. They also can have a major investment in equipment, furnish their own supplies, provide their own insurance, repairs, and other expenses related to their business. They may also perform a unique service that is not in the normal course of business of the employer. This contrasts with employees, who usually work at the schedule required by the employer, and whose performance the employer directly supervises. Independent contractors can also work for multiple firms, and offer their services to the general public. [2]

The distinction between independent contractors and employees is not always clear, and continues to evolve. For example, some independent contractors may work for a number of different organizations throughout the year, while others retain independent contractor status although they work for the same organization the entire year. [6] Other companies, for example in the freight transport industry, specify the schedule for the independent contractor, require purchase of vehicles from the company and prohibit work for other companies. [3]

In July 2015, the U.S. Department of Labor issued new guidelines on the misclassification of employees as independent contractors. "A worker who is economically dependent on an employer is suffered or permitted to work by the employer. Thus, applying the economic realities test in view of the expansive definition of "employ" under the Act, most workers are employees under the Fair Labor Standards Act." [7] [8]

... the economic realities of the relationship, and not the label an employer gives it, are determinative. Thus, an agreement between an employer and a worker designating or labeling the worker as an independent contractor is not indicative of the economic realities of the working relationship and is not relevant to the analysis of the worker's status. [7]

Specific occupations

Examples of occupations where independent contractor arrangements are typical:

Advantages and disadvantages

Independent contracting has both benefits and drawbacks to contractors.

Advantages

Firms in the sharing economy such as Uber can gain substantial advantages via the misclassification of employees as independent contractors. [11]

Disadvantages

Independent contracting in tort

The employer of an independent contractor is generally not held vicariously liable for the tortious acts and omissions of the contractor, because the control and supervision found in an employer–employee or principal–agent relationship is lacking. However, vicarious liability will be imposed in some circumstances:

  1. where the contractor injures an invitee to the real property of the employer,
  2. the contractor is involved in an ultra-hazardous activity (one likely to cause substantial injury, such as blasting with explosives), or
  3. the employer is estopped from denying liability because he has held out the independent contractor as if he were simply an employee or agent.
  4. the employer is involved in an operation subject to obligations imposed by a public authority

Alternatives

Due to the higher expense of maintaining employees, many employers needing to transition from independent contractors to employees may find the switch difficult. There is a transitional status for employees as an alternative to independent contracting known as being a statutory employee. Statutory employees are less expensive to hire than classic employees because the employer does not have to pay unemployment tax. But they are more expensive than independent contractors because Social Security and Medicare taxes must be paid on wages. Similarly to independent contractors, statutory employees can deduct their trade or business expenses from their W2 earnings. [2]

Dependent contractor

A growing number of workers do not neatly fit the government's categorizations of independent contractors and statutory employees, and are increasingly being classified as dependent contractors. Some of these contingent workforce—independent contractors, temporary workers, and part-time workers, who work when and for how long they want, such as those who work for such companies as Uber, Handybook, Inc., and CrowdFlower—have filed lawsuits that argue that companies that substantially control workers' work and behaviors while working (such as at Handybook, Inc.: when to knock on customers' doors vs. ring the doorbells, and how to use the customers' bathrooms) should be covered by minimum-wage and overtime rules under the Fair Labor Standards Act, as well as receive other traditional employee protections. Wilma Liebman, former chairperson of the National Labor Relations Board, has observed that Canada and Germany have such protections in place for contingent workers. And UK Prime Minister David Cameron has appointed an overseer for freelance workers in that country, to determine how the government should support freelance workers. [17] [18] [19]

See also

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Dynamex Operations W. v. Superior Court and Charles Lee, Real Party in Interest, 4 Cal.5th 903 was a landmark case handed down by the California Supreme Court on April 30, 2018. A class of drivers for a same-day delivery company, Dynamex, claimed that they were misclassified as independent contractors and thus unlawfully deprived of employment protections under California’s wage orders. Their claims raised the question of what the appropriate standard was to determine whether workers should be classified as employees or as independent contractors under California’s wage orders.

References

  1. ↑ "The Rise of The 1099 Economy: More Americans Are Becoming Their Own Bosses". Forbes .
  2. 1 2 3 4 5 Brabec, Barbara (November 26, 2014). How to Maximize Schedule C Deductions & Cut Self-Employment Taxes to the BONE -. Barbara Brabec Productions. p. 107. ISBN   978-0985633318.
  3. 1 2 Koch, Matthew (June 6, 2014). "The Tax Risks of Misclassifying Employees". The National Law Review. McBrayer, McGinnis, Leslie and Kirkland, PLLC. Retrieved June 14, 2014.
  4. ↑ "Financial Control". IRS. September 13, 2017. Retrieved October 2, 2017.
  5. ↑ McConville, Timothy M. (May 20, 2014). "Don't Misclassify Workers as Independent Contractors". The National Law Review. Odin, Feldman & Pittleman, P.C. ISSN   2161-3362 . Retrieved June 14, 2014.
  6. ↑ IRS Frequently Asked Questions about form 1099-MISC
  7. 1 2 Weil, David (July 15, 2015). "The Application of the Fair Labor Standards Act's "Suffer or Permit" Standard in the Identification of Employees Who Are Misclassified as Independent Contractors" (PDF). United States Department of Labor. Archived from the original (PDF) on July 16, 2015. Retrieved July 15, 2015.
  8. ↑ Trottman, Melanie (July 15, 2015). "Employees vs. Independent Contractors: U.S. Weighs In on Debate Over How to Classify Workers". Wall Street Journal. Retrieved July 15, 2015.
  9. ↑ Ahmad, Umair (November 4, 2020). 125 Freelance Business Ideas. Youth Publishers. ISBN   978-969-2215-00-8.
  10. ↑ "Musicians can't strike but face same struggles as actors, writers". August 7, 2023.
  11. ↑ Lauren Smiley (April 20, 2015). "What Strippers Can Teach Uber". No. Medium.com. Retrieved April 21, 2015. Many of these companies are built with workers who are not even considered workers at all. In a twist of business logic that drives much of the sharing economy, these delivery people, drivers, and maids aren't employees – they're entrepreneurs.
  12. ↑ "U.S. Cracks Down on ‘Contractors' as a Tax Dodge" article by Steven Greenhouse in The New York Times February 17, 2010
  13. ↑ Salon – Taxes for union busting
  14. ↑ Radio New Zealand – Truck drivers to lose jobs
  15. ↑ See definition of FICA Tax Archived January 12, 2012, at the Wayback Machine .
  16. ↑ Times-Standard – Logger deaths highlight safety concerns; contractors exempt from state guidelines
  17. ↑ DeSantis, Joe (February 4, 2015). "The Dependent Contractor?". American Society of Employers.
  18. ↑ Weber, Lauren (January 28, 2015). "What if There Were a New Type of Worker? Dependent Contractor (On-Demand Workers Need Job Protections, Some Argue)". Wall Street Journal.
  19. ↑ Arthurs, H. W. (1965). "The Dependent Contractor: A Study of the Legal Problems of Countervailing Power". The University of Toronto Law Journal. 16 (1). University of Toronto Press: 89–117. doi:10.2307/825096. JSTOR   825096.
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