• Kierra MacDougall, Esq.

Independent Contractors: Who Are You?

Are you having a worker identity crisis? Is it unclear if you are an employee of the company or an independent contractor? Sure you may go to work in the same building as the company’s employees, hang out by the same water cooler, maybe even steal a few brownies from the free food table, but that alone doesn’t mean you are an employee.

Knowing your worker identity -- employee or independent contractor -- is something you should figure out before signing an employment contract. Independent contractors, also known as “freelancers” or “1099 employees,” are hired out by companies to perform specific projects (e.g. photography, proofreading, consulting, etc.). These projects are generally limited in duration and the independent contractor has freedom to control how the project is completed. If an employment contract has already been presented to you, check out the job duties section and see what exactly you are doing for this company. Maybe there is an opportunity to contract out your services and start that side hustle?

There’s actually benefits to using freelance work on both sides - for the freelancer and company. If there’s ever an option to choose, employee vs. independent contractor, consider the pros and cons:

CompaniesPros and Cons of Hiring Freelancers

Pros: Engaging in services on an as-needed basis results in a strategic use of resources compared to hiring a permanent employee. It limits legal liability and there is no need to pay employee benefits, taxes, or the mandated minimum wage.

Cons: Contracting with freelancers could potentially lower work quality. Inconsistencies could result from using multiple freelancers, there is a general lack of control over the finished work product, or lack of control over protecting the company’s intellectual property.

WorkersPros and Cons of Being a Freelancer

Pros: You are your own boss. There is flexibility in your work --- the method you use to get the work done, setting your own working hours, choosing which jobs you want to undertake, and financial control over your profits.

Cons: You are liable for your own actions. You are an entrepreneur because you use your spidey senses to identify the danger in new business ventures, yet go after them anyways -- with great precision! But as Peter Parker’s Uncle Ben may have said, with great power comes great responsibility (#spiderman). You’ll have to consider insurance options to protect your business and yourself. Also, there may be additional costs you have not considered (e.g. overheard, equipment, certifying your business, etc.). This all depends on the services your business is offering.

Misunderstanding your role and responsibility in your relationship with a company may result in troubling financial, legal, and tax consequences – for workers AND companies. It’s a lot to take in, but luckily written contractual agreements can help. You’ll find that your employment contract or your independent contractor agreement can clarify any misunderstandings. Attorney Christina A. Simpson, Esq. can help you put your duties and expectations in black and white, then assist you in bringing that pen to paper.

MIXING UP WORKER IDENTITIES-- “But I’m an employee?”

Now let’s say you thought you knew your worker identity. You signed a contract that said “employment contract” at the top, so that means you are an employee, right? Not always. Sometimes relationships between workers and their companies can change or maybe the language of the contract never actually accurately portrayed your role in the company. Looking at what you do, you may even be considered an independent contractor -- which would expose you to certain liabilities, legal obligations, and more.

Defining Independent Contractors: Who’s in control?

It’s understandable too be unclear on this topic because the definition of an independent contractor has not been clearly defined. Federal laws, state laws, and common law principles have all come up with guidelines when it comes to determining the difference between an independent contractor and an employee of the company.

In any case, classifying a worker as an independent contractor has a lot to do with analyzing the relationship between the worker and the company – specifically the level of control the company has over the worker.

In Massachusetts, if the company wants to treat a worker as an independent contractor, then the company must provide evidence that the worker’s work is:

  1. Is done without the direction and control of the employer; and

  2. Is performed outside the usual course of the employer's business; and

  3. Is done by someone who has their own, independent business or trade doing that kind of work.

Loosely similar to Massachusetts law is the guidelines provided by the Internal Revenue Service (IRS) -- guidelines we will consider in this blog post. Under the IRS guidelines, this analysis can be broken down into three main categories: (1) behavior control, (2) financial control, and the (3) type of employment relationship.

(1) Behavior Control: How Does the Worker Perform the Work?

An independent contractor will retain control over the method and manner of the work. The only control the company has is over the finished result of the independent contractor’s work. The company gives minimal instruction as to how the worker carries out his or her own activities and duties.

Take for example a married couple who hires a wedding photographer for their ceremony. The married couple really has no control over how the photographer shoots and edits the photographs - they are only interested in accepting the end result of those captured “I do” moments. The photographer most likely has her own camera equipment, photo editing software, and creative process. The couple would not be evaluating the photographer’s work methods and performance. There may be some mutual brainstorming of ideas from the married couple, but full control is in the hands of the photographer, the independent contractor.

The more evidence that shows the worker operating independently from a company, meaning the less control the company has over the worker, the more likely the worker will be considered an independent contractor.

(2) Financial Control: What are the Business Aspects of the Worker’s Activities?

How you are compensated will help determine your employment status. You are likely to be considered an independent contractor if you are sending invoices to the company for the work you performed. In other words, you are charging a fee for your service. An employee of the company would only receive a paycheck from the company's payroll. The independent contractor has some sense of economic independence from the company, retaining the right to offer his or her service to others in the market. So in this situation, the company is acting more like your client rather than your employer.

Related to compensation arrangements is the issue of tax payments. It is important to take note that the independent contractor is responsible for satisfying all tax obligations, including self-employment tax, Social Security, and Medicare taxes. Also, the independent contractor is the only one responsible for reporting earned income to the federal government, through the help of a 1099 form. An employee’s earned income is subject to applicable federal, state, and local taxes. If you are an employee, usually the company, as the employer, will withhold these taxes from the employee’s paycheck. At the end of the year, the employer will report the employee’s income earned during the year to the employee and the federal government through the help of a W-2 form.

(3) Type of Relationship: How is the Relationship Perceived by the Worker and/or Company?

It may go without saying, but just because a company decides to withhold taxes and/or believes their worker is an employee doesn’t automatically mean that the worker is an employee. The IRS or the reviewing court will look to hard evidence as to how the relationship is perceived. They may look at the language in written contracts, such as consulting agreements or employment contracts. Any sort of employee benefit type plans (e.g. pensions, insurance, vacation pay) in place may prove an employee-employer relationship. These written agreements may shed light as to how long the relationship between the worker and company was meant to last and the nature of the worker’s duties.

TRANSFORMING DEFINITION of FREELANCERSReviewing contractual provisions like job duties, compensation, or liabilities in your employment contract or independent contractor agreement can shed light on your status with a company. The language used in these contracts are important as it will have an impact on your legal obligations.

An independent contractor will not be protected by the same federal, state, or local laws designed to protect employees (e.g. wage and hour laws, anti-discrimination, payroll withholdings, workers’ compensation benefits, and unemployment benefits).

However, the definition of an independent contractor and their legal obligations -- and protections -- are changing across the United States as more and more individuals are following their entrepreneurial spirit. The small business landscape is transforming with a rise in individuals engaging in the on-demand economy. As a result, workers and regulatory agencies are challenging the definition of an independent contractor under state and federal law. An on-demand worker is generally one who uses an outside company’s host technology site to connect with users to make a profit (think UBER for car service, Wag! for dog walking, or Airbnb for accommodations). Based on past guidelines, these on-demand workers fit the definition of independent contractors but states across the United States will differ on that determination. For example, in California, the court found UBER drivers to be employees while on the other side of the country, a Philadelphia court found UBER drivers to be considered independent contractors.

Today, easy access to technology and education is giving individuals the confidence boost they need to jump in and start their own businesses. Just look at the growing on-demand economy. In response, other established companies are strategically using independent contractors to help achieve their mission and maximize profits. It’s all about using talent efficiently.

If the worker or company misunderstands the worker-company relationship then that efficiency could be lost. Or worse, one side could take advantage of the ill-informed side. To be more informed, know your worth to the company, where you stand in the relationship, and actually read those written agreements.

If you’ve come across a worker identity crisis yourself and have questions on the tax or legal consequences of misclassification as it relates specifically to Massachusetts Law, please reach out to Attorney Christina A. Simpson, Esq. here.

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