by Jonathan A. Massimino, Associate

Independent contractors are widely used in the construction industry.  When accelerating project work or entering into a takeover agreement, independent contractors are viable options to meet labor demands without taking on the additional costs related to actually employing the individual.  Those added costs can include workers’ compensation and health benefits, wage/hour requirements, and other similar employment costs.  Because of the financial advantages associated with adding independent contractors to a workforce, it is tempting to hire individuals as independent contractors when, under the law, those individuals are properly classified as employees.  Simply hiring an individual on a “contract” basis oftentimes is not enough to make that person an independent contractor in the eyes of the law.

Intentional or otherwise, hiree misclassification can lead to significant liability for the contractor, and lawsuits of this type are on the rise as both private individuals and public agencies have initiated recent enforcement actions.  If an opportunistic plaintiff’s attorney is able to defeat the claimed independent contractor status, liability for wage/hour violations is almost automatic as employers tend not to keep track of overtime or meal and rest periods for independent contractors.  The liability extends beyond an obligation to the individual, as tax and government-provided benefits issues often arise as a result of the misclassification.  Accordingly, it is important for contractors to avoid hiring project personnel as independent contractors and then treat them as employees.

The analysis used in determining whether an individual is an independent contractor or an employee is a complex one, but there are a few simple guidelines that can be used to assist in reaching a final determination.  One good rule to remember is that if the individual in question is unable to provide his or her own business Massimino, Associate card, that individual will most likely be considered an employee instead of an independent contractor.  The IRS also provides persuasive guidance regarding the independent contractor/employee dichotomy.  The IRS has streamlined its guidelines from the traditional 20-factor test into three categories: behavioral control; financial control; and the relationship of the parties.  No single factor or fact will make or break the analysis.  Rather, the ultimate determination is based upon a review of the totality of the circumstances.  Also, note that while the IRS guidelines are helpful, each jurisdiction may have its own set of factors to use in making this decision.  The factors described below, however, likely share some common elements with each jurisdiction.

The first of the IRS’ guidelines, behavioral control, generally refers to the extent of the employer’s control over the work of the individual.  The greater the amount of the employer’s control, the more likely it is that the individual is an employee instead of an independent contractor.  Specifically, the presence of factors such as instructions regarding how, when and where the work is to be performed, what tools or equipment to use, whether to hire any assistants to complete the work, and where to purchase supplies for the work, as well as training about required procedures and methods for the work, are indicative that the individual is an independent contractor and not an employee.  In contrast, if the individual’s services are integrated into essential business operations, or there is a continuing relationship between the individual and the company, the individual may be considered an employee.  Other considerations are that independent contractors are generally free to assign the completion of the work to other individuals, and are usually responsible only for the result of the work.  Overall, in order to properly be considered an independent contractor, the individual must retain a high degree of independent control over how the subject work will be completed.  The more control the employer maintains over the worker, the more likely it is that the individual is actually an employee of the company.

Financial control over the relationship between the company and the individual is another factor in the determination whether a contractual or employment relationship exists. If the individual maintains his/her own work facilities, has the freedom to work for other companies and/or take on other projects, can make his/her services available to the general public, can realize a profit or loss on the work, is paid on a “by-project” basis, as opposed to an hourly or monthly basis, and does not have his/her travel and/or business expenses reimbursed by the company, then the individual is likely to be considered an independent contractor. Again, it is important to consider and treat the independent contractor as a separate business entity. This is one of the surest methods to keep independent contractors and employees separate, and to avoid liability for misclassifying individuals working for you.

Finally, another factor in establishing an individual as an independent contractor, is whether a written agreement exists governing the relationship of the parties. Indeed, the absence of a written contract, no matter how favorable the other factors may be, could be significant enough to make a worker an employee instead of an independent contractor. Other factors in this category include whether the worker receives benefits, the right of the worker to quit without incurring liability, and the right of the employer to terminate the worker at any time. If a contract governs the relationship, the termination of that relationship is likely regulated by that instrument, indicating an independent contractor relationship. Without a contract, the presumption of at-will employment allows either party to terminate the relationship with only certain legal limitations. The existence of a contract is considered a strong indicator of an independent contractor relationship, and should be the clear starting point for any employer who intends to have an independent contractor relationship with its workers.

Attention to this dichotomy is increasing, as evidenced by the recent case of Cristler v. Express Messenger Systems, Inc. In that case, the California Court of Appeal refined previous holdings regarding the employee/independent contractor distinction pursuant to California law. The Court of Appeal, citing previous cases, held that the most crucial factor to be used in making the employee/independent contractor distinction is the extent of that individual’s freedom to control the means and manner of completing the work. The lesser the degree of freedom, the Court of Appeal held, the more likely it is that the individual is an identify other factors used in the analysis, such as whether the individual is engaged in a business or occupation distinct from the employer, the extent to which the individual’s work is directed and/or supervised, the length of time and method of payment for the services provided, and the intent of the parties in regard to the establishment of a contractual or employment relationship.

The failure to take these factors into consideration when hiring workers can lead to some significant liability. One example is found in the recent settlement of a case involving the Orange County, California newspaper, The Orange County Register. In that case, a class action lawsuit was brought on behalf of newspaper carriers who had been classified by the newspaper as independent contractors. The carriers claimed that they were misclassified and were actually employees. They brought claims for failure to pay minimum wage and overtime, failure to provide meal and rest periods, failure to reimburse business expenses, unlawful wage deductions, waiting time penalties, failure to keep accurate payroll records and provide adequate wage statements, and unfair business practices. This case evidenced that the alleged failure to properly classify individuals as employees can open the door to virtually every conceivable wage/hour claim.

The plaintiff newspaper carriers sought damages in the nine-figure range, and were granted class certification for their claims against the newspaper. After more than four years of costly litigation, the case was settled mid-trial in November 2008 for $42,000,000. One of the determining factors in the settlement was convincing testimony from both the carriers and the newspaper’s management team at trial that the newspaper exerted almost complete control over the manner and means by which the newspaper carriers delivered the newspapers, which evidenced an employment relationship, thereby subjecting the newspaper to liability for its alleged failure to comply with the wage/hour laws.

The tough lesson learned by The Orange County Register should be taken to heart by employers everywhere, especially those in the construction industry where it can be especially tempting to reduce costs by bringing on independent contractors. While there is nothing wrong with this particular business decision, it is crucial to consult the guidelines in your jurisdiction before doing so. In the final analysis, a written instrument should govern the relationship with the worker, and the worker must retain a relatively high degree of independent control over his or her work in order to be classified as an independent contractor in the eyes of the law.

The information or opinion provided in this article is the author's own and not necessarily that of Watt, Tieder, Hoffar & Fitzgerald, LLP. The author is solely responsible for the information and opinion that he or she has provided. The information contained herein does not replace seeking specific legal counsel to directly address individual client needs.

Watt, Tieder, Hoffar & Fitzgerald is one of the largest construction law firms in the world, with a practice that encompasses all aspects of construction contracting, claims and disputes resolution, and transactional legal services. WTHF principally represents large general contractors, design firms, and sureties throughout the country and internationally.