- Hiring An Independent Contractor Does Not Always Protect, an Employer From Liability
- May 19, 2003 | Author: Gerald B. Chattman
- Law Firm: Buckingham, Doolittle & Burroughs, LLP - Cleveland Office
In recent years, there has been a movement by many employers to hire independent contractors rather than employees, or to attempt to convert their existing employees into independent contractors. The initial impetus for the move to independent contractors was to save taxes. With an employee, the employer must pay a share of withholding tax as well as social security. Employing independent contractors frees the employer from some of these taxes.
The Internal Revenue Service has taken a dim view of this move away from employer/employee relationships to employer/independent contractor relationships. The Internal Revenue Service has adopted a multi-point test with some 20 to 25 factors which its agents are to analyze in making the determination of whether an individual is truly an employee or an independent contractor.
The key test, however, out of the numerous factors is the "right of control." In essence, if the employer merely assigns a task and the individual carrying out the task can determine the method, mode, time, tools, etc. for completing the assignment, the individual is most likely an independent contractor. On the other hand, if the employer dictates the time and place for the work to be performed, the method, tools, materials and the like, the IRS will normally find that the individual is an "employee." If the employer makes an improper designation, it not only has the obligation to pay the taxes that it failed to pay, but it must also include interest and penalty.
Now, in a new ruling by the Ohio State Supreme Court, Pusey v. Bator, the Court has given Ohio employers another reason to be very cautious about engaging independent contractors. In Pusey, Greif Brothers, a manufacturer of steel drums in the Youngstown area, hired a guard service to protect its property. Grief did not specify whether the guards were to be armed or unarmed, and did not specify the manner or method for protecting the property. The Court readily found that Youngstown Security Patrol ("YSP"), the security contractor, was in fact an independent contractor.
The Trial Court had held that even if the trespasser's death was a result of YSP's negligence, Greif Brothers was not liable because YSP was an independent contractor and, as a general rule, an employer is not liable for the negligent acts of its independent contractors.
The Court of Appeals affirmed the Trial Court's decision; however, the Supreme Court rejected the Trial Court's reasoning, stating that although the general rule is that an employer is not liable for the negligent acts of its independent contractors, "there are however, exceptions to this general rule, several of which stem from the non-delegable duty doctrine." The Court held that an employer may not delegate (1) "affirmative duties that are imposed on the employer by statute, contract, franchise, charter or common law, and (2) duties imposed on the employer that arise out of the work itself because the performance creates dangers to others (i.e., inherently dangerous work)." The Court reasoned that since the duty in such instances cannot be delegated, the liability also cannot be transferred.
Although the facts in the Pusey case involve the negligent use of a firearm, the Court stated, "work is inherently dangerous when it creates a particular risk of harm to others unless special precautions are taken." Applying this reasoning, one can envision that the Court might find that the storage or movement of hazardous materials, operation of dangerous equipment, and a myriad of other work environments could fall into this "exception," preventing employers from shifting liability by engaging the services of an independent contractor.
The bottom line of the Pusey decision is that an employer must take special care when determining to use an independent contractor as opposed to its own employees. First, of course, there are always the tax consequences of making the wrong election as to whether an individual is an employee or in fact an independent contractor. Secondly, there is the danger that even if an individual is in fact an independent contractor, the employer may not escape liability because of one of the exceptions to the general rule. Thirdly, since the employer has little or no control over the independent contractor by the very nature of the relationship, the employer can do less to protect itself from liability for the negligent acts of an independent contractor. And, finally, there are issues as to whether the employer can insure itself against acts of an independent contractor in the same fashion as it can insure against the negligent acts of its own employees. Thus, decisions to employ independent contractors or to substitute independent contractors for one's own employees should be reviewed carefully with legal counsel to make certain the type of liability which attached in the Pusey case can be avoided.