He's not my employee ... or is he? How to evaluate independent contractors.

• Author: Ramseur, Patti
• Position: LAW JOURNAL 2010

Engaging an independent contractor instead of hiring an employee can be a huge cost savings--no overtime pay, benefits, tax withholdings, FICA obligations or liability for certain legal claims. It is estimated that employers save approximately 30% in various worker costs by using an independent contractor instead of an employee. If that sounds too good to be true, that may be the case.

It is very expensive if an employer misclassifies an employee as an independent contractor. Such misclassification can cause a host of liability issues--back overtime pay, interest, liquidated damages, federal income-tax liability, FICA contributions, penalties from the Internal Revenue Service and exposure for workers' compensation, unemployment and federal discrimination claims under Title VII, the Americans with Disabilities Act and the Age Discrimination in Employment Act.

So, is he my employee or not? North Carolina and federal courts and the IRS all apply different, multi-factored tests to determine whether a worker is an independent contractor or an employee. There is no one clear and easy test that applies, although a number of the factors utilized are geared toward determining which party--the employer or the worker--retains the greatest amount of control over the method and manner in which the work is performed. Employers are charged with the often daunting task of carefully analyzing the particular facts and circumstances of the working relationship between the parties in light of different tests that may be applied, which often depends on the federal or state agency that is investigating. One thing is clear--simply calling a worker an independent contractor does not make it so.

From time to time, courts give employers pointed reminders of how costly it is to misclassify a worker as an independent contractor. In January, the N.C. Court of Appeals considered a situation in which a trucking company had leased a truck to a third party and contracted with a driver to run the third party's routes. While the trucking company paid the driver a flat fee of 32 cents per mile, the driver had to qualify with the third party under its driver-training program, including its physical-fitness test and its rules and regulations, and he worked out of the third party's Charleston, S.C., terminal. In fact, the court even found that the third party leasing the truck had "exclusive control, possession, and use" over the truck and directed where and when the driver...