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The Importance of Properly Classifying Independent Contractors

August 1, 2019

I.             Employer/Employee Relationships

The federal government allows for many different types of employer/employee type relationships. By “employer/employee type relationship,” I mean one person completes a task or service for someone else or on the behalf of someone else and receives compensation for it. Florida has four main types and additional subcategories. A contract employee is an actual employee whose terms of employment are strictly governed by the terms of the contract. This article is not about those types of employees. Another type of employer/employee type of relationship is the service provider. This one is usually confusing to some because some of the examples given can also fall into the category of regular at-will employee, independent contractor, or contract employee. A distinguishing is based on who directly compensates the service provider. If the compensation provided by the employer is given directly to the service provider and not retained as full compensation by the individual; given to a third party; or provided by someone else, then they are probably properly categorized as a service provider. An example would be a plumber who works for roto-rooter. The largest numbers of employees in Florida are best defined as at-will employees. At-will employees are best defined by their ability to begin or end their employment by both the employer and employee.  An at-will employee has the right to quit a job anytime they like for whatever reason they like with near impunity. It may affect your ability to receive unemployment benefits. Other than that, there are no other governmental concerns. Likewise, the employer can terminate the employee’s employment for any reason other than an unlawful reason. They also have unemployment compensation concerns. Finally there is the independent contractor. Independent contractors fall into a separate category altogether. We are going to take a look at some of the distinguishing characteristics of independent contractors and the pros and cons for both the employer and the individual.

II.           Independent Contractor Defined

You could search the definition of independent contractor on the internet and usually come across a fairly consistent summary. In general, “People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors.” This is a generalization that must be evaluated based on the guidance provided by the Internal Revenue Service and Florida case law. For each of the examples provided, you can find where the term “independent contractor” does not apply. It all depends on the relationship between the parties. You can visit the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee for more information.

Florida case law has also weighed in on proper classification of the employer/employee relationship. In Villazon v. Prudential Health Care Plan, 843 So. 2d 842, 844 (Fla. 2003), the court clarified that “"Independent contractor" is a term which is antithetical to the word "servant," although not to the word "agent." In fact, most of the persons known as agents, that is, brokers, factors, attorneys, collection agencies, and selling agencies are independent contractors since they are contractors but, although employed to perform services, are not subject to the control or right to control of the principal with respect to their physical conduct in the performance of the services.” The court clarified that the focus was not on the labeling but on the conduct.

The point has been consistent for decades as indicated in Fla. Indus. Com. v. State, 155 Fla. 772, 774, 21 So. 2d 599, 600 (1945). The principle was well founded as early as World War II when the courts defined an independent contractor as “one who pursues an individual employment or occupation and represents his employer as to the results of his work but not as to the means by which the results are accomplished.” This focuses the determination on the amount of autonomy the workers has in achieving the outcome rather than the label bestowed. 

III.          Benefits to the Employer

The employer can avoid federal and state statutory requirements of employers. Employers can eliminate the need to deduct federal and state taxes for income. This includes federal income tax, state income tax, and social security tax. Employers can also avoid the need to pay payroll taxes. The state of Florida also requires employers to maintain workers’ compensation insurance based on the number of employees and type of industry however the requirement is eliminated when an employer has no employees. The federal and state government also require strict adherence to the Fair Labor Standards Act (FLSA) which governs several aspects of employee treatment.

In addition to taxes, the need for employee benefits is eliminated. Employers have no need to incur the cost of providing employees with paid time off, insurance, or retirement benefits. The cost of servicing taxes and benefits is also eliminated. The accounting and coverage cost are completely eliminated. Also, the need to comply with FLSA standards is eliminated. A party bus operator who takes 20 hours with a group for $200 is permissible for an independent contractor but may not be permissible for an employee who make a $10 hourly wage. Even with all of these benefits eliminated, employers overwhelmingly choose to have regular employees over independent contractors for one simple reason…control. The ability to direct who, what, when, where, why, and HOW, is incalculable. The cost of properly doing the job the first time is always less costly than doing it over, and over, and over…

IV.         Benefits to the Independent Contractor

The primary benefit for employees is autonomy. This includes the ability to determine when (within reason) and how the job is done. In many cases of an independent contractor, the employer lacks the knowledge or ability to complete the task. A lawyer, in many cases, is a good example. The client retains the lawyer to represent them. The client tells the lawyer the desired outcome. The lawyer decides how to achieve the desired outcome because in most cases, the client is unable to do it on their own. The lawyer is autonomous for the most part and is mostly a conduit for information between the client and all the other moving parts.  

Still, being an independent contractor isn’t for everyone. Independent contractors are self-employed. They must make accommodations for their own taxes, costs, benefits, and retirement. It is for some people and for some people it isn’t.

V.           Steps to Take to Ensure Proper Categorization

Evaluate how much autonomy your employers have in determining how they get the job done. Do you provide benefits to your employees? Improperly classifying employees as independent contractors can be costly for employers. You can lose workers’ compensation indemnification. You can be held responsible for back taxes. You can face legal liability for acts or omissions of the improperly classified “independent contractor.” The potential liabilities can be substantial. If you have any questions, contact an attorney who is knowledgeable in labor/employment law.

 

 

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