As an employment lawyer in Maine, I routinely deal with a number of small, locally-owned businesses. Many small businesses are, at least in my experience, often interested in achieving two interrelated but somewhat competing goals: (a) expanding their operations and/or increasing output; while also (b) minimizing the (sometimes prohibitive) costs and overhead that accompany such expansion. One idea that is frequently discussed is hiring new workers on an independent contractor basis, rather than as employees.
Independent contractors absolutely serve important business functions. However, you should not decide to hire someone as an independent contractor without first giving the matter careful thought. There can be serious consequences for misclassifying a worker as an independent contractor rather than an employee.
In Maine, the default presumption in most circumstances is that a worker is an employee and not an independent contractor. The burden rests on the hiring party to demonstrate otherwise. Contrary to what many people believe, simply having a contract indicating that the person is an independent contractor is not, itself, sufficient (although it is still an important component – see below). There are multiple tests that various state entities use when determining whether or not someone counts as an independent contractor. An example of one such test, which is used for workers’ compensation, unemployment insurance, and wage and hour purposes, is as follows.
First, the hiring party must satisfy each of the following criteria:
a)The worker has the essential right to control the means and progress of the work she has been hired to perform, except as to final results;
b) The worker is customarily engaged in an independently established trade, occupation, profession, or business;
c) The worker has the opportunity for profit and loss as a result of the services being performed for the hiring party;
d) The worker hires and pays her own assistants, if any, and to the extent such assistants are her employees, supervises the details of the assistants’ work; and
e) The worker makes her services available to some client or customer community, even if the worker’s right to do so is voluntarily not exercised or is temporarily restricted.
Additionally, the hiring party must satisfy any three (3) of the following criteria:
a) The worker has a substantive investment in the facilities, tools, instruments, materials, and knowledge used by her to complete the work;
b) The worker is not required to work exclusively for the hiring party;
c)The worker is responsible for satisfactory completion of the work and may be held contractually responsible for failure to complete it;
d) The parties have a contract that defines the relationship and gives contractual rights in the event the contract is terminated by the hiring party prior to the completion of the work;
e) Payment to the worker is based on factors directly related to the work performed and not solely on the amount of time expended by the worker;
f) The work to be completed is outside the usual course of the hiring party’s business; or
g) The worker has been determined to be an independent contractor by the United States Internal Revenue Service.
26 M.R.S. § 1043(11)(E). There are other tests used in other contexts as well, but all generally turn on whether or not the worker is “free from the essential direction and control” of the hiring party.
The consequences for misclassifying an employee as an independent contractor can include: (a) liability for back payment of unemployment and/or workers’ compensation insurance premiums; (b) liability to federal and state taxing authorities for employer-paid employment taxes and mandatory tax withholdings, together with penalties and interest; (c) penalties and interest to federal and/or state entities for violating labor and/or safety laws; (d) loss of workers’ compensation immunity, and exposure to costly lawsuits if the worker was injured on the job; and/or (e) a state-imposed fine of between $2,000 to $10,000 per violation, if it is determined that the worker was intentionally misclassified.
This is not intended to dissuade employers from using independent contractors, as they can and do serve legitimate business functions. The point is that the decision to hire someone as an independent contractor should not be taken lightly, and employers would be well advised to seek legal counsel before going down this road.
Rudman Winchell’s experienced employment lawyers are happy to lend guidance in this regard. We are also able to assist with preparing written independent contractor agreements, when the circumstances warrant such a relationship.