Independent Contractor or Employee? (Or, am I like an Uber driver?)

INDEPENDENT CONTRACTOR OR EMPLOYEE?

            Are you an independent contractor or an employee? How do you find out and why does it matter anyway?

"Independent contractor" and "employee" are not just insignificant names or labels in Maryland. This distinction is legally important and just calling someone by one name or the other,or reporting earnings on a Form 1099 instead of a Form W-2, does not make them what they are called. The specifics of the work must be looked at. A  multi-pronged test is used under both Maryland and federal law to determine whether you are an independent contractor or an employee. These terms are explained in a complex web of Maryland and federal case law, statutes, and regulations. This article does not answer specific questions, but gives a general guideline of the factors applied in determining whether you are legally deemed to be an independent contractor or an employee. Some of these factors are: control, hours, work location, pay schedules, expense reimbursement, tools and materials, training, continuing relationship, reporting, benefits, supervision, level of flexibility, and hiring and firing.

In general, an independent contractor is likely to have more control over his or her work and more flexibility to work when and where he or she likes, with less supervision and accountability on the daily steps of the work involved. Often, an independent contractor can schedule their own hours, may work offsite, and may not have a typical boss or supervisor. An independent contractor is responsible for getting the specified work done in the manner that they choose. This, however, does not mean that they lack accountability. An independent contractor still has a specified job to do and a deadline by which to have it done. Independent contractors may be paid hourly or per project. They typically do not receive benefits such as health insurance, disability insurance, unemployment insurance, sick leave, or vacation pay.

In contrast, an employee, in general, has much less control and flexibility. Typically,an employee has a boss or supervisor, specified hours, and parameters set by an employer on how and when work should be done, to the employer's standards.  While many employees work in an office, some tele-commute or work remotely, but are still under the control of the employer. Employees may be entitled to receive benefits including health insurance, life insurance, disability insurance, unemployment insurance, pension or profit sharing, and sick and vacation leave.

So why does it matter whether you are an employee or independent contractor? First, employees are protected by a variety of wage and anti-discrimination laws that do not necessarily apply to independent contractors. Another ramification of the classification as an independent contractor or employee is that an employer is required to withhold certain federal and state taxes, such as Social Security or "FICA" taxes, worker's compensation and unemployment taxes, and other payroll taxes, from an employee's paycheck. An independent contractor, however, does not have these taxes withheld and instead must file and pay quarterly tax returns and pay estimated tax with Maryland and the Internal Revenue Service. If an employer improperly classifies a worker as an independent contractor when the person is actually an employee, the employer can be liable for back withholding taxes and even fines and penalties.

An overall summary of these issues can be found on the Maryland Department of Labor, Licensing and Regulation website at:

http://www.dllr.state.md.us/labor/wagepay/wpempindcont.shtml

and at the Maryland Workers' Compensation Commission website at:

http://www.wcc.state.md.us/gen_info/wcc_benefits.html

                For federal tax status, the IRS has published helpful information on the factors taken into consideration by the federal government in evaluating whether one is deemed to be an independent contractor or employee:

https://www.irs.gov/pub/irs-pdf/p15a.pdf

                                                               The Uber Case     

           In addition to many of the challenges faced by Uber worldwide, a recent hot issue has arisen in the US as to whether Uber drivers are employees or independent contractors. State courts have come to different conclusions. Maryland has not considered this issue in the Uber context, but it stands to reason that this issue is one with nationwide appeal. 

           Recently, a California Labor Commissioner decided that Uber's classification of its taxi drivers as independent contractors is wrong. In 2014 an Uber driver in California named Barbara Ann Berwick filed a wage complaint in California, seeking reimbursement for business expenses -- gas and bridge tolls. Some other states considering this same issue found that people working for Uber were, in fact, independent contractors. In the California case, Uber refused to reimburse these expenses arguing that Berwick was an independent contractor, not an employee entitled to such reimbursement. 

           The California Labor Commissioner awarded Berwick these expenses, finding that Ms. Berwick was an employee under a detailed "economic realities" test under California law. The Commissioner noted that Uber provided iPhones to its drivers, monitored and required certain ratings for all drivers, and had sole discretion to set and negotiate the prices customers would pay. The Commissioner also found that Berwick's job did not require a special skill. In addition, in weighing these factors, the Commissioner found that Uber had a large degree of control over its drivers, thus making them employees, with the full protections to which employees are entitled. 

          While Maryland is not bound by a California decision, it can be persuasive. The Uber issue is a prime example of the varied factors and interpretations used in determining whether one is an independent contractor or employee.

What Should a Maryland Employer or Employee Do?

When accepting a position or hiring, it is critical to keep in mind that whether you call someone an independent contractor or an employee has significant ramifications. Simply calling a person an independent contractor will not legally make it so. Misclassifications can cause independent contractors to miss out on key employment benefits and protections and can result in penalties for an employer, including payment of back taxes, fines, and other penalties.

For people working in the construction, home improvement, and landscaping areas, Maryland law provides some protection against misclassification by employers. The Maryland Workplace Fraud Act of 2009, which was amended in 2012, sets requirements for the classification of a person as an independent contractor or an employee. This was enacted because too many people in these jobs were automatically told they were independent contractors, when they might have legally been employees entitled to employment law protections and benefits.

Because the classification of a worker as an independent contractor or employee requires a careful analysis of many factors, it is wise to obtain legal counsel and speak to an accountant when you are unclear on this important issue.

For more discussion, see  http://www.paleyrothman.com/wp-content/uploads/2013/11/MBJ_Nov13_final_krasnoff_hammerschmidt.pdf; and http://www.msba.org/uploadedFiles/MSBA/Member_Groups/Sections/Labor_and_Employment_Law/laborwinter11.pdf.

There is No Such Thing as a "1099 Employee"

An independent contractor by definition is a person or can be another company even, who is hired to perform a job for another person or business. How, where, and when the job gets done is under the sole control of the contractor, not the hiring company. On the other hand an employee is a person hired by a company to perform a job function within a business and the hiring company controls how, when, and where the job is performed. There is no such thing as a “1099 employee.” The two are totally separate classifications under law and can’t be combined into one. Someone who does work for your company is either an independent contractor or an employee and cannot fall under both categories.

One of the major differences between independent contractors and employees are that independent contractors are responsible for paying their own taxes from their earnings. The hiring company is not responsible for withholding state and federal taxes, Social Security or Medicare taxes for a contractor or vendor. Employers are responsible for paying the income of their employees as well as withholding all taxes and offering healthcare benefits under law.

The IRS has a 20 point checklist to help businesses properly classify their workers as either independent contractors or employees. Here are the major points used to classify independent contractors:

• Who has control? A worker is an employee if the person for whom he works has the right to direct and control him concerning when and where to do the work. The employer need not actually exercise control; it is sufficient that he has the right to do so.

• Right to fire. An employee can be fired by an employer. An independent contractor cannot be fired so long as he or she produces a result that meets the specifications of the contract.

• Training. An employee may be trained to perform services in a particular manner. However, independent contractors ordinarily use their own methods and receive no training from the employer.

• Set hours of work. Workers for whom you set specific hours of work are more likely to be employees. Independent contractors, on the other hand, usually establish their own work hours.

Misclassifying an employee as an independent contractor can result in serious fines and penalties by the IRS. 1099 refers to the form companies issue to independent contractors for tax purposes. It’s very important you aren’t issuing a 1099 designation to someone who should be classified as an employee and receive W-2 forms instead, which documents how much money was withheld throughout the year for federal, state, Social Security and Medicare taxes. To help you determine the right classification for your workers, consult the complete IRS checklist. If you’re still unsure, it might be best to consult an accountant or a business attorney who specializes in small business and corporate laws.