INDEPENDENT CONTRACTOR
A person who contracts to do work for another person according to his or her own processes and methods; the contractor is not subject to another’s control except for what is specified in a mutually binding agreement for a specific job.
An independent contractor contracts with
an employer to do a particular piece of work.
This working relationship is a flexible one that
provides benefits to both the worker and the
employer. However, there are drawbacks to the
relationship as well. The decision to hire or work
as an independent contractor should be weighed
carefully. Properly distinguishing between
employees and independent contractors has
important consequences, and the failure to
maintain the distinction can be costly.
Taxes
The status of independent contractor carries
with it many tax ramifications. For example, an
employee shares the costs of SOCIAL SECURITY
and MEDICARE taxes with his or her employer;
whereas an independent contractor is responsi-
ble for the entire amounts.Yet independent con-
tractors generally qualify for more business
deductions on their federal income taxes than
do employees. Also, independent contractors
must pay estimated taxes each quarter, whereas
employees generally have taxes withheld from
their paychecks by their employer.
One important disadvantage of working as
an independent contractor is that standard
employment benefits—such as health, life, den-
tal, and disability insurance; funded retirement
plans; paid vacation time; and paid maternity or
PATERNITY leave—are not available. Indepen-
dent contractors may fund their own benefits,
but not on a tax-free basis—whereas many ben-
efits provided by employers to employees are, by
law, tax free.
Labor Relations
Congress and the states have enacted
numerous laws geared toward protecting
employees. The National Labor Relations Act (29 U.S.C.A. § 152(3)) protects employees and union members from unfair bargaining prac-
tices; Title VII of the CIVIL RIGHTS ACT OF 1964
(42 U.S.C.A. § 2000 et seq.) protects employees
from discrimination on the basis of race, sex,
religion, and national origin; the Age Discrimi-
nation in Employment Act (20 U.S.C.A. § 623)
protects employees from age discrimination; the
FAIR LABOR STANDARDS ACT (29 U.S.C.A. § 203)
establishes MINIMUM WAGE and overtime stan-
dards; the EMPLOYEE RETIREMENT INCOME
SECURITY ACT of 1974 (29 U.S.C.A. § 1002)
ensures the security of employee retirement
funds; and the OCCUPATIONAL SAFETY AND
HEALTH ACT (29 U.S.C.A. § 652) protects
employees from environmental work hazards.
Most states also have unemployment and WORK-
ERS’ COMPENSATION laws, which obligate
employers to pay, directly or indirectly, for med-
ical treatment or lost wages, or both, for
employees who are injured while at work or who
lose their job. None of these laws protect inde-
pendent contractors. And because compliance
often comes at great expense, employers can sig-
nificantly reduce their liability and increase their
profit margin by hiring independent contractors
rather than employees.
Economics and Social Policy
Although not protected by law to the extent
of an employee, an independent contractor has
far greater control over elements such as work
hours and work methods. Unlike most employ-
ees, an independent contractor may opt to work
at night or on weekends, leaving weekdays free.
An independent contractor may choose to wear
blue jeans or a business suit, take one week of
vacation or 30 weeks, or interrupt work to
attend a child’s school play or to go to the beach.
Moreover, although the other contracting party
retains control over the finished work product,
an independent contractor has exclusive control
over the actual work process. Decisions such as
whether to work for one person or several,
whether to work a little or a lot, whether to
accept or reject an undesirable work project, and
how much money to charge are made by the
independent contractor.
The other party, in turn, enjoys mainly
profit-related advantages by hiring an inde-
pendent contractor instead of an employee. For
one thing, an employer need not provide an
independent contractor with vacation time,
PENSION, insurance, or other costly benefits.
Management costs that ordinarily go toward
training and overseeing large numbers of
employees decrease when independent contrac-
tors do the work. Some say that because inde-
pendent contractors benefit directly from their
hard work, the quality of their work may be
higher than it is for full-time employees who
might be less motivated. And by hiring inde-
pendent contractors, an employer enjoys the
greater ease and flexibility to expand and con-
tract the workforce as demand rises and falls.
Tort Liability
The common-law doctrine of RESPONDEAT
SUPERIOR holds an employer liable for the neg-
ligent acts of its employee. Generally, under
COMMON LAW, the hiring party is not responsi-
ble for the NEGLIGENCE of an independent con-
tractor. The Restatement (Second) of Torts
identifies a few exceptions to this rule. The hir-
ing party may be liable when, owing to its failure
to exercise reasonable care to retain a competent
and careful contractor, a third party is physically
harmed. Also, when an independent contractor
acts pursuant to orders or directions negligently
given by the hiring party, the latter may be held
liable. Notwithstanding the exceptions, the hir-
ing party’s risk of liability is greatly reduced by
hiring independent contractors rather than
employees.
Defining the Independent Contractor
No consistent, uniform definition distin-
guishes an employee from an independent con-
tractor. Some statutes contain their own
definitions. The U.S. Supreme Court has held
that when a statute contains the term employee
but fails to define it adequately, there is a pre-
sumption that traditional agency-law criteria
for identifying master-servant relationships
apply (National Mutual Insurance Co. v. Dar-
den, 503 U.S. 318, 112 S. Ct. 1344, 111 L. Ed. 2d
581 [1992]).
One comprehensive test that takes into
account agency-law criteria and numerous other
factors courts have created to define independ-
ent contractor status was developed by the
INTERNAL REVENUE SERVICE (IRS). Known col-
lectively as the 20-factor test, the enumerated
criteria generally fall within three categories:
control (whether the employer or the worker has
control over the work performed), organization
(whether the worker is integrated into the busi-
