Understanding the distinction between independent contractors and employees | VailDaily.com
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Understanding the distinction between independent contractors and employees

If you called a toad a dove, would it sprout wings and fly? Okay, bear with me here, the same applies to the relationship between a person working on or on behalf of another, and the other person upon whose behalf the work is done. Let’s, for convenience, call the second person the “employer,” although, technically, the person upon whose behalf the work is performed may or may not be an employer. If the first party is an employee, then the second party is an employer. Alternatively, if the first party is a subcontractor, then the second party is, instead of an employer, a contractor. Let’s not, however, make the distinction here; in either instance, I will refer to the person upon whose behalf the work is done as the employer.Essentially, what you call something (whether a toad cum dove, or the nature of a business relationship) does not necessarily make it so. Simply calling a person who works for you a subcontractor, rather than an employee, even if you call him or her a subcontractor in a written agreement, does not control how the law may interpret the relationship. Similarly, calling a person an employee (even in a written agreement) does not, through some act of prestidigitation, necessarily make him or her into one.The reason for the distinction is important and has potentially serious consequences, both legal and financial. Employers have certain responsibilities to employees that they do not have as to subcontractors and, it is precisely for this reason that the temptation lies to categorize workers as subcontractors rather than employees.Generally, employers are responsible for acts of their employees. Liability can arise to the employer simply as a function of the person acting on behalf of the employer as his or her agent. The same is generally not true of a subcontractor. As a subcontractor is legally separate and distinct from the “employer,” he or she does not act as the employer’s agent; accordingly, liability will not be implied to the employer for the “independent” acts of the subcontractor.Employers also have certain financial obligations to employees that they do not have to subcontractors. In most circumstances, an employer must contribute on an employee’s behalf to the Colorado Unemployment Insurance Fund, must provide the employee with worker’s compensation insurance and make Social Security contributions. Additionally, the employer must withhold state and federal taxes from the employee’s compensation. The same, however, is not true of the employer’s obligation to a subcontractor; no such contributions or tax withholding requirements apply.Mis-characterizing an employee as a subcontractor, however tempting, could however lead to serious financial consequences. If a party characterized by the employer as a subcontractor is later found (by audit or otherwise) to really be an employee, the employer may be held liable for all contributions it should have made on the employee’s behalf (such as workers’ comp and unemployment insurance) as well as the amount of federal and state taxes which should have been withheld.If calling a worker a subcontractor (or employee), even subject to written agreement, does not settle the matter, what then is the test? If called into question, how will it be judged whether a party is, or is not a subcontractor versus an employee?Well, sadly, there is no single test, no litmus by which the relationship is measured. Instead, the totality of the circumstances will dictate how to categorize the matter. There are, however, well recognized guideposts which direct how the relationship will be assessed.Probably, the most essential of these guidelines has been referred to as “direction and control” test. In shorthand, if the employer has the right to direct and control the worker as to the means by which the work is performed, the worker is likely an employee. Conversely, if what matters in the relationship is simply that the work is performed to some accepted specification but the employer does not direct or control how the end product is achieved then the worker is more likely a subcontractor.There are several refinements in the case law directing and applying application of this test and while the case law gives a general feel of how the relationship may be interpreted, in certain circumstances (such as under the Colorado Employment Security Act, the Workers’ Compensation Act, Fair Labor Standards Act, IRS regulations, and others) certain factors may be given more or lesser weight and certain additional matters may be factored into the blender of consideration.Among the factors one must consider are included: whether or not the employer has the power to control the details of accomplishing the end result. The more employer control, the more likely the worker will be considered an employee; the power to terminate without liability. If the employer can fire at will without liability, the worker is more likely an employee; providing the tools necessary to perform the job. If the worker supplies his or own tools, it is more likely that he or she is a subcontractor; hiring and firing the worker’s assistants. If the worker rather than the employer hires and fires his or her own assistants, he or she is more likely a subcontractor; if the work is performed at or on the employer’s premises or shop, the worker is more likely an employee. If the worker is paid in a lump sum for the completed services rather than paid a salary he or she is more likely a subcontractor; if the worker works for persons other than, or in addition to, the employer, he or she is more likely a subcontractor; and the more similar the work the worker performs to the kind of business in which the employer engages, the more likely he or she is an employee.The foregoing are just a few highlights and there can be and often are potentially dozens of other similar tests depending upon the venue of the controversy and the circumstances specific to employment.Suffice it to say that while it may be facile to term a worker a subcontractor rather than an employee, the short-term savings which may be realized can be dramatically off-set upon legal review of the matter.If all the facts spell “employee” rather than “subcontractor,” can the employer avoid more trouble than it’s worth? When pigs (or toads) sprout wings and fly. Rohn K. Robbins is an attorney licensed before the Bars of Colorado and California who practices in the Vail Valley. He is a member of the Colorado State Bar Association Legal Ethics Committee and is a former adjunct professor of law. Robbins lectures for Continuing Legal Education for attorneys in the areas of real estate, business law and legal ethics. He can be heard on Wednesdays at 7 p.m. on KZYR radio (97.7 FM) as host of “Community Focus.” He can be reached at 926-4461 or at robbins@colorado.net.Vail, Colorado


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