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Independent Contractor Agreements

Many businesses routinely use independent contractor agreements.  Whether those non-employees working for the business are consultants, independent contractors or vendors, business can benefit greatly from using independent contractors rather than hiring employees.

Some of the benefits to the employer include:

  1. Not having to withhold federal taxes
  2. Not having to pay Social Security and Medicare taxes
  3. Not having to pay federal employment taxes
  4. Not having to pay workers compensation insurance
  5. Not having to pay employee benefits
  6. Not having to pay healthcare insurance
  7. Not having to pay for office space, equipment and other overhead

Although there are many benefits to hiring independent contractors over employees, there are benefits to having employees as well.  The employer can train employees to do the job in the manner expected by the employer.  An employee can’t work for other competitors while working for the business.  Employers can create a consistent workforce and have a better chance of retaining employees for a longer period of time.  Another reason employers continue to hire employees over independent contractors is because the government scrutinizes whether the worker is being properly classified as an independent contractor.  The state may audit the business to see if the worker is properly classified. There has been an increase in the number of lawsuits in which employees were held to be misclassified resulting in large penalties and back taxes to be paid by the employer recently.

Federal and state law requires businesses to properly classify workers as either employees or independent contractors.  An employee is a worker over whom the company has the right to supervise and control the manner of performance.  An employee is hired by the business and is paid through the business’s payroll system.

An independent contractor is an individual who provides services or expertise to the business, outside of the business’s usual course of operation, and is free from the business’s control or direction when providing services.  The criteria for determining whether a worker is an independent contractor are discussed below.

Determining whether a worker is an independent contractor or an employee is fact specific and the entire relationship must be reviewed.  Federal and state courts have developed various tests for determining employee or independent contractor status.  These tests look past the labels given to any situation and focus on the “right of control” exercised by the company over the contractor.

In Minnesota, state agencies use a common law factor analysis similar to the Internal Revenue Service to determine the status of a worker. Minnesota’s common law factors have been defined by the Minnesota Court system.  Of the twenty factors defined by the courts, the five factors that carry the most weight are:

  1. Control: Does the firm or does the worker control the means and manner in which the services are performed?
  2. Discharge: Can either party sue for breach of contract or can the firm or worker terminate the relationship at will withourt incurring any legal liability?
  3. Investment: Does the firm or the worker dictate the value placed on the services provided? Is the worker paid by the job or in a regular and routine manner?
  4. Investment: Does the firm or the worker furnish any car or truck, tools or equipment, and/or materials or supplies necessary to perform these services?
  5. Premises: Does the firm or does the worker control the premises where these services are performed?

The written contracts are also important in determining if a worker is an independent contractor or an employee.  They are not determinative, but if an independent contractor operates under a business name and provides services distinct from those of the company, advertises their services and has multiple clients, it is more likely to be considered an independent contractor and not an employee.

Independent contractors can enter into written agreements with the hiring organization outlining the project, deadlines, costs and expenses, the parties’ right to terminate the relationship can be set forth in the written agreement and is not an “employment at will” situation.

There is no conclusive way to ensure that a worker who does work for a business is classified as an independent contractor and not an employee. The important consideration is the entire relationship and the degree or extent of the right to direct and control the relationship.  The more control the business has over the person doing the work, the more likely they will be found to be an employee.  For this reason, written independent contractor contracts are important in documenting the relationship and are the best method of documenting that relationship.

If you are a business thinking of hiring an independent contractor or an individual deciding to work for a business as an independent contractor, you should contact an experienced employment attorney to assist you with setting up this relationship.  Contact Holden Law Firm and we can assist you with this.

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