Employee or Independent Contractor?

• Publication year: 2006
• Pages: 4

Wyoming Bar Journal 2006.

Vol. 29, No. 1 #4 (February 2006). Employee or Independent Contractor?

WYOMING LAWYER
February 2006/Vol. 29, No. 1

Employee or Independent Contractor?

Why the distinction between the two is so important

By Scott W. Meier

Over the past six months, I have received several requests to either discuss the independent contractor designation or draft independent contractor agreements. The issues associated with these requests include not only the legal aspects of independent contractor arrangements but also the tax aspects as well. In a time of increasing demand for workers and workforce development, employers often use independent contractors and temporary employees to bolster their workforces. Use of such individuals, however, can be risky if the employer has not properly classified them

Classifying workers as independent contractors and temporary employees may allow employers to avoid certain payroll taxes and costly employee benefits. Nevertheless, if employers have misclassified workers, the potential damages can include huge amounts for unpaid benefits, taxes and penalties. The simple fact remains that it is not the choice of the person doing the hiring nor the person being hired that determines an individual's status as an employee or an independent contractor, but the factual nature of the relationship between the parties. The financial consequences of incorrectly categorizing workers who are employees as if they were independent contractors can be devastating to the employer.

THE DISTINCTION BETWEEN AN EMPLOYEE AND AN INDEPENDENT CONTRACTOR

The distinction between an "employee" and an "independent contractor" is often blurry. Moreover, the definition of an employee differs by statute. The determination of a person's status is important and has additional implications concerning employer liability for workers' wrongs. This liability depends on the worker's status.

It is helpful to first know who an employee is. Sometimes, employers have obligations to employees they do not have to other people; sometimes, employers have obligations to all those the employer engages to work for them, whether or not they are employees.

Several different approaches provide legal definitions of an employee versus a contractor. According to Black's Law Dictionary, an "employee" is "[a] person who works in the service of another person (the employer) under an express or implied contract of hire, under which the employer has a right to control the details of the work performed." BLACK'S LAW DICTIONARY 543 (7th Ed. 1999). Wyoming case law does not define an employee but by reference to the Wyoming statutes. In SOS Staffing Service, Inc. v. Fields,(fn1) the Wyoming Supreme Court stated that for wage claims, the term "employee" ". . . means any person engaged in any extrahazardous employment under any appointment, contract of hire or apprenticeship, express or implied, oral or written, and includes legally employed minors and aliens authorized to work by the United States department of justice, immigration and naturalization service."2

In Diamond B Services, Inc. v. Rohde,(fn3) for purposes of wage claims, citing Wyo. Stat. 7-4- 501(a)(ii) (LexisNexis 2003), the Wyoming Supreme Court defined "employee" as "any person who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee."(fn4)

An independent contractor, on the other hand, is one whom someone hires to undertake a specific project, but is generally free to do the assigned work and to choose the method of accomplishing it. The Wyoming Supreme Court in Diamond B Services defined an independent contractor as ". . . one who, exercising an independent employment, contracts to do a piece of work according to his own methods and without being subject to the control of his employer except as to the result of the work."(fn5)

WHY DOES IT MATTER?

Because employers have different obligations toward employees than independent contractors, properly categorizing those hired becomes extremely important. From a lawyer's standpoint, probably the most immediate thought that comes to mind with respect to independent contractor/employee issues is the concept of respondeat superior. As a matter of public policy and economic requirement, a master is liable for damages caused by the negligence of his servant while acting within the scope of the servant's employment.(fn6) Under this principle, an employer is liable for an employee's wrongful acts committed within the scope of the employment.(fn7)

Employers of independent contractors, although potentially responsible for injuries to employees of the contractor, must assume a controlling and pervasive role in work being done to generate any duty of care sufficient to establish vicarious liability for negligence of the independent contractor.(fn8) Respondeat superior will not operate to impute the tort of an independent contractor to his employer. Nor are employees of an independent contractor entitled to recover from an owner for injuries suffered while doing inherently dangerous work required under a contract with the owner.(fn9)

While many lawyers can appreciate the doctrine of respondeat superior, they may not appreciate the significance of tax related issues associated with the distinction between independent contractors and employees. More important, many lawyers do not realize the significant penalties associated with tax related issues when employers incorrectly categorize those they hire.

From a payroll standpoint, the law does not require employers to make unemployment contributions or pay...