Employee or Independent Contractor?

I’m planning on hiring some new workers, but I want to ensure they are independent contractors and not employees. How do I do that?

Especially in today’s business climate, more small business owners are finding they need additional help, but cannot afford the regulatory and financial costs of hiring new employees. In an effort to get the additional help they need, while minimizing costs, many of them are attempting to hire new workers as independent contractors, rather than employees. This can lower costs because employers generally do not have to withhold taxes from independent contractors or cover them under workers’ compensation insurance. At times, however, the distinction between independent contractor and employee can be very fine, and you’ll want to make sure you stay on the right side of the line. Depending on the context (legal, tax, etc.), different authorities (the courts, IRS, etc.) will decide whether the worker is an employee or independent contractor.

However, the distinction of employee versus independent contractor often turns on who is controlling the work. If the employer is in control, the worker is typically an employee. If the worker is in control, he or she is typically an independent contractor. Since “control” is a little ambiguous, the North Carolina Supreme Court came up with 7 factors which are used to determine who has control of a job.

1. Is the worker engaged in an independent business or occupation? If the answer is yes, the relationship looks more like an independent contractor relationship. This factor frequently turns on who supplies the materials for a job. If the worker is supplying the materials, he’s more likely to be an independent contractor.

2. Does the worker use special skill, knowledge, or training? Again, a yes answer is indicative of an independent contractor relationship. A worker who had to go to school for a certain career or who has to be licensed to do a certain type of work is more like to be considered an independent contractor under this factor.

3. How is the worker paid? If she is paid a fixed price, she is more likely to be an independent contractor. If she is paid by the hour, day, week, or year, he looks more like an employee.

4. Can the worker be discharged for doing the work a certain way? If so, it is more probable she is an employee. If she can do the work however he wants, as long as the end result is achieved, she is more likely to be an independent contractor. This factor is generally given the most weight of any of the factors, but it alone will not decide the issue.

5. Is the worker regularly employed by the employer? If so, she tends to be an employee. Regular employment does not mean exclusive employment. A worker can still be considered an employee of one company even if he occasionally does work for other companies.

6. Is the worker able to select his own assistants and does he have control over them? If so, it is indicative of an independent contractor.

7. Does the worker select his own time? If he has to be at work for certain hours, the worker is more likely an employee. If he gets to pick his own time, he’s more likely an independent contractor. The worker must be free to set his own hours to be considered an independent contractor under this factor. If he gets to pick his hours from time that the employer is open for business, courts tend to view him as an employee.

These factors are always looked at as a whole; no single factor will decide the issue. It is also important to note that even if the parties themselves call the relationship and independent contractor relationship, the courts (and taxing authorities) are free to rule otherwise if the factors indicate the relationship is that of employer/employee. Since this issue is so dependent on the individual facts in each situation, it is highly recommended you consult with a lawyer to avoid creating an employer/employee relationship when you are trying to hire an independent contractor.