• Independent Contractor Status: Useful in the Right Circumstances
  • January 18, 2006 | Author: Anne M. Radolinski
  • Law Firm: Fredrikson & Byron, P.A. - Minneapolis Office
  • Many companies have discovered the administrative and other advantages of engaging the services of certain individuals as independent contractors rather than employees. The independent contractor relationship is definitively less complicated. Independent contractors are not covered under company benefit plans. Payroll withholdings and deductions do not apply. They are not entitled to statutory benefits and protections afforded employees such as unemployment compensation and worker's compensation. Independent contractors in most instances cannot take advantage of the various anti-discrimination protections of the federal, state and local human rights laws, and normally cannot bring an action against the company for the familiar employment-related legal claims. The relationship between the company and the independent contractor is typically governed solely by the terms of a written agreement, and thus the termination of the relationship is straightforward if the agreement is drafted properly. Companies can indeed benefit, in the appropriate instance, from an independent contractor relationship.

    While a useful tool, companies must be careful to utilize independent contractor status only where the individual is appropriately classified as independent under the various legal standards. The legal tests focus on substance rather than form. A written independent contractor agreement between the company and the individual, or the company and the contractor company, is required. However, courts and agencies will look beyond even a well-crafted independent contractor agreement to determine whether the individual truly meets the legal tests for independent contractor status in the day-to-day services the contractor performs for the company.

    The most important of the many factors is whether the individual actually operates independently or is in fact subject to the supervision and control of the company. For instance, if the individual, in carrying out duties and responsibilities under the agreement, is regularly subject to the supervision, guidance, and control of one or more management or supervisory individuals at the company, the individual is most likely an employee, regardless of the terms of the agreement or method of payment. In contrast, an individual who is engaged in a consulting capacity and who brings a level of expertise and analysis to a project or process is more likely to be an independent contractor.

    Challenges to independent contractor status typically arise at the end of the relationship. The disgruntled contractor might file for unemployment compensation or file a worker compensation claim, ignoring terms in the agreement that state that the contractor is not entitled to either benefit. The disgruntled contractor might alternatively contact the Department of Labor and file a complaint that he or she should have been paid overtime or should have been allowed a Family and Medical Leave, and that he or she should have been classified as an employee. As another example, the contractor might elect to file a discrimination charge with a human rights agency, alleging that he or she should have been classified as an employee and was subject to some manner of illegal discrimination, harassment, or retaliation.

    In any of these situations, the agency contacted will assess whether the individual was appropriately classified as an independent contractor, or whether he or she should have been classified as an employee. If the agency determines that the individual should have been classified as an employee, the company may be subject to penalties and assessments in addition to liability under the various employment-related statutes. Agencies also have the ability to report the misclassification to other governmental agencies and authorities.

    Challenges to independent contractor status in Minnesota in particular may become more frequent in light of recent legislation highlighting the issue. Under Minnesota Statute Section 181.722, employers are prohibited from misrepresenting the true nature of an employment relationship or entering into an agreement that results in the misclassification of an individual as an independent contractor. In the event a court finds a violation of the statute, the court is required to transmit its decision to the state commissioner of labor and industry. That commissioner in turn is required to alert the commissioner of revenue, the commissioner of commerce, the IRS, the United States Department of Labor, and the commissioner of employment and economic development. Due to the complexity of this issue and the risk involved, companies are advised to contact legal counsel to discuss independent contractor classification and, if appropriate, the preparation of agreements to reflect this status.