5. Paying By the Hour
How a business pays someone is about a fundamental a work-variable as one can get. And it can be one of the most fundamental indicators of whether a worker is an employee or an independent contractor. See Rev. Rul. 87-41, 1987-1 C.B. 296, point 12. Classically, one pays a contractor for a job, like putting a pool in your backyard, repairing your computer system, or putting in a break room at your office. In contrast, one classically pays employees by the hour or by the week.
Yet it is surprising how many businesses don't think about this issue, much less explore ways to package it. There is no rule saying that one cannot pay an independent contractor by the hour. After all, that is how most lawyers bill time to their numerous clients.
But when one has alternatives, paying by the hour can be unwise. Consider whether you can come up with a payment regimen that fairly covers all the elements going into the work and yet that is independent contractor-like in scope. Ideally, a project fee or success fee is more consistent with independent-contractor status than an hourly rate. Help your clients to be creative in considering compensation alternatives.
Furthermore, you may be able to help your client to address any tool, equipment, and supply issues, and even expense reimbursements, as part of the payment formula you devise. As the discussion of those topics noted (see No. 3 "Providing Tools and Supplies" and No. 4 "Reimbursing Expenses" above), you don't want to provide items that are employee-indicators. Yet if an independent-contractor worker arrives at the job site with no hammer, understandably, you may want to provide one.
The answer may be to do so but to have the business charge back the worker for the item provided. The worker could have the charge subtracted from his invoice at the end of the week. As a lawyer, you may find that a little creative thinking with independent contractors will help your clients to remain in the same place economically but with a vastly better appearance, viz., the likelihood independent-contractor treatment will be upheld.
6. Failing to Have Consistent Forms and Documents
The fact that your client calls someone an independent contractor does not make it so. An "employee lounge" sign in an office does not mean only employees can go there. The fact that one pays a worker based on a time card and then issues a check and paystub does not make him or her an employee. But all these things add up.
Sometimes, after all, something is what you call it. So help your clients consider whether they should have an "employee file" for each employee and use a different name for independent contractors. Ask your clients to consider if independent contractors should turn in an "invoice," not a time card. Ask your clients to consider whether independent-contractor discipline should be handled in exactly the same way as employee discipline. Usually, changes in terminology or substance can be made that may not impact your client's business but that may help your client materially to bolster independent-contractor treatment.
With an independent contractor, one is paying for a product or result. With an employee, one is paying for him or her to do what is asked, whatever that might be. With employees, one controls not only the nature of the work, but the method, manner, and means by which they do it. In Alford v. United States, 116 F.3d 334 (8th Cir. 1997), for example, a church pastor was ruled at the district court level to be an employee, but the ruling was reversed by the Eighth Circuit based on the lack of institutional control the national and regional churches had over the operation of his church.
This control factor is the most over-arching point in this area. It is also the most over-arching way in which clients can end up in trouble with workers they believe are independent contractors but who might be ruled otherwise. How much does your client check in with workers, monitor what they are doing, or make suggestions? How frequently must the workers check in with your client and report how and what they are doing?
Urge your clients to be very careful with supervision and control. The mere fact that an independent contractor must provide a weekly progress report on how the installation of the new laundry room in your house is going does not mean the builder is an employee. But if the report involves constant tweaking and redirecting of the effort, it might be otherwise. See Rev. Rul. 70-309, 1970-1 C.B. 199; Rev. Rul. 68-248, 1968-1 C.B. 431; Rev. Rul. 87-41, 1987-1 C.B. 296.
Note that the important inquiry is not merely whether the business is exercising control over the method, manner, and means by which the worker is doing the job. It can even be fatal if your client has the legal right to do thi--even if the client fails to exercise it. Treasury Regulation Sections 31.3121(d)-1(c)(1) and 31.3401 make clear that the common law right-to-control standard is generally controlling in these matters. For that reason, urge your clients to be careful what their contracts and other documents say about reports, supervision, and the like.
8. Requiring Set Hours
One of the classic signs of employee status is a time clock or set office hours. In contrast, with independent contractors, one should normally pay for the result, not exactly when or how the worker does it. See Rev. Rul. 87-41, 1987-1 C.B. 296, points 7-8. That does not mean an employer cannot have some control over the hours an independent contractor works.
For example, the fact that you tell your building contractor not to work on your kitchen remodel past 7:00 p.m. does not make him or her an employee. Nevertheless, it is surprising how many businesses fail to consider which workers need to be on a set schedule and which workers do not. Lawyers can be good issue spotters, and should help the client to consider whether certain workers can be allowed to complete work on their own schedule as long as they meet applicable deadlines. Such flexibility can help to show that the workers involved are independent contractors. Conversely, it can be telling if your client dictates a 9 to 5 and fulltime schedule.
9. Prohibiting Competition
Many businesses using independent contractors require full-time work, prohibit competition, or both. Neither of these points alone is likely to be dispositive of an independent contractor versus employee characterization battle. They are merely factors in the determination. For example, an anesthesiologist who entered into contracts with hospitals guaranteeing to have anesthesia services available at any time (a marker of employee status) was deemed to be an independent contractor (see Rev. Rul. 57-380, 1957-2 C.B. 634, Rev. Rul. 87-41, 1987-1 C.B. 296, point 17).
For that reason, lawyers should urge business clients to consider whether the business needs such rules and why. Optimally, if your client is paying for a particular result-such as selling a minimum dollar volume of goods each month-the client should stick to that target. Point out to the client that it may be inappropriate to focus on how long the worker may take to do it or where else they may work during the same period. Those details are arguably irrelevant.
Since requiring full-time work and/or no competition will be viewed as more employee-like in nature, ask your clients to consider whether it is a good idea to dictate these terms. Always bear in mind the paradigm case: an independent contractor like a lawyer or plumber serving many clients or customers. If your clients are worried about the worker giving away the company's business methods or intellectual property to a competitor, make those concerns explicit. Focus on prohibiting the worker from disclosing the company's property. That may accomplish the client's major goal and may be cosmetically much more pleasing.
10. Attempting the Impossible
As a lawyer, it is never easy to be the bearer of bad news. Yet failing to point out obviously flaws in the client's operations or documents can be a mistake and can even result in malpractice liability. If your clients cannot possibly keep their influence and direction over workers to a minimum, cannot possibly let them come and go as they please, cannot allow them to work part-time and for other companies, and can't abide the thought that they may make some of their own decisions, is it realistic for your clients to even try to treat them as independent contractors?
Probably not. In that situation, even if you urge your clients to apply some of the points noted here, the clients may be asking for trouble-either immediately or down the road-if they do not admit face facts.
That may mean simply treating the workers as employees. Sometimes cutting corners ends up costing the business considerably more money in the long run than if appropriate actions were taken in the first place. This occurs over and over with independent-contractor issues. Lawyers are uniquely qualified to offer such perspectives.
As an alternative to a wholesale reclassification, the business could apply this principle in stages, such as by focusing on particular types of workers or even time periods. Lawyers can help business clients engage in a kind of triage to help limit their exposure. Plainly, it is technically wrong to suggest that all short-term workers are independent contractors.
However, a business could try independent-contractor status for short-term workers and those it is trying to evaluate. If the business tries working with someone on an independent-contractor basis for three months as a kind of evaluation period, that might keep them out of company health plans, payroll processing and employment tax returns, and even worker's compensation and unemployment insurance rolls.
If the worker settles in well, the company could bite the bullet and treat them as employees. If the worker fails, the company could assume that even if the person is later recharacterized as an employee, the company's financial exposure should be fairly limited. For example, if your client "fires" such a worker after two months, will he qualify for unemployment benefits?
The object of this kind of approach is to limit the business client's exposure. At least the big picture would be better because the company's long-term workers would be employees. Even if the company ends up losing a worker-status dispute later, the employment tax or other liabilities for short-term workers should be fairly limited. In contrast, if the company is aggressive with widespread independent-contractor treatment and fails to take some of the steps I advocate here, the company could have staggering liabilities.
Business lawyers must often wear multiple hats, and this may particularly be true in such fundamental legal issues as worker status. Yet the role of the lawyer in helping clients through these circumstances should not be underestimated. Help your clients to evaluate what you are trying to do, what is realistic to expect, and whether your clients are being reasonable.
Moreover, urge your clients not to make this a static or one-time process. Like an annual medical checkup or annual visit with an estate planning lawyer over the terms of a will, companies and their counsel should periodically evaluate workers, their status, duties, and treatment. The more frequently companies do it the less likely it will be that they have major problems to address. As a lawyer, you should be suggesting these evaluations even if your clients are not volunteering. The optimum time for evaluations and for addressing these worker status issues is before there is a lawsuit, audit, or investigation. Don't wait.