"Independence Day--
Just because a firm intends to establish a contractor relationship doesn't mean state and federal agencies won't classify the individual as an employee"
by Richard S. Rosenberg

A growing trend among law firms is the use of independent contractors to provide an array of law firm functions such as attorney and paralegal services, clerical, file room, library, messenger delivery and reprographics. While outsourcing has clear benefits, treating the workers who provide such services as independent contractors also carries significant legal risk. Many firms find out the hard way that independent contractor status is not conferred merely because the worker is obtained through a temporary staffing agency, the worker claims to have an independently owned business and performs like services for others or the worker is engaged by a third party providing the service to the firm. Nor is contractor status solely a matter of contract.

There are over one dozen federal and state agencies enforcing laws bearing on some aspect of the employment relationship, e.g., income and employment taxes (Internal Revenue Service; California Franchise Tax Board; California Employment Development Department); wage/hour (U.S. Department of Labor; California Division of Labor Standards Enforcement); job bias (U.S. Equal Employment Opportunity Commission; Office of Federal Contract Compliance Programs; California Department of Fair Employment and Housing); job safety (Cal/OSHA); workplace injuries (California Workers' Compensation Appeals Board); labor relations (National Labor Relations Board); unemployment insurance (California Unemployment Insurance Appeals Board); and disability insurance (California Employment Development Department). These agencies will presume that every worker in the firm is an employee and place the onus on the firm to prove otherwise. Unfortunately, each agency has its own set of criteria for evaluating the matter. State and federal courts have adopted several different common law tests as well. To further complicate matters, a favorable determination of contractor status by one agency is not determinative or binding on another.

There are numerous negative consequences if the firm incorrectly characterizes an employee as an independent contractor. For example, a law firm can be held responsible for the worker's unpaid state and federal income taxes and social security withholdings which should have been deducted from the worker's paycheck. Un. Ins. C. ? 13000, et seq., IRC ?? 3100 and 3400 et seq. There is also significant exposure in connection with employee benefit plans, such as retirement plans, profit sharing plans and group health insurance where a worker is improperly excluded from the plan as an independent contractor. State workers' compensation laws subject the firm to a civil action by an injured worker where the worker is erroneously classified as an independent contractor. Cal. Labor C. ? 3700, et seq. Additionally, the wage/hour and job bias laws pose thorny compliance obligations if it is determined that the firm is the actual statutory employer or a so-called "joint employer."

The concepts of part time and temporary employment should not be confused with independent contractor status. Many firms mistakenly assume that independent contractor status is established merely because the worker claims to have an independently owned business and performs like services for others. The fact that a worker provides services independently for others is certainly probative of independent contractor status, but is by no means determinative. Nor does obtaining workers through a temporary agency or outsourcing an entire function to a third party necessarily provide a safe harbor. There are a number of well established legal theories which can hold the firm responsible as an employer or so-called "joint employer." See EEOC Enforcement Guidance: Application of EEO Laws to Contingent Workers (12/3/97). Firm administrators should carefully read the fine print on any outsourcing or other services agreement because many expressly create a joint employment relationship or seek to hold the law firm responsible by way of indemnity for labor law issues.

Who Is A Contractor? When considering the status of an individual as an employee or an independent contractor, both the courts and administrative agencies look to the facts and the economic realities surrounding the relationship between the employer/principal and such individual. The determination will not be governed by the label that parties have placed on the relationship. Therefore, the mere fact that an employer designates someone as an "independent contractor" will not be decisive in the absence of other factors also evidencing an independent contractor relationship.

The state and federal agencies consider several factors in determining independent contractor status. No single factor is determinative. Accordingly, all factors must be considered, and a final determination must be based upon a realistic appraisal of the information as a whole. To complicate the matter further, different agencies, as well as different investigators, weigh these factors differently. It is possible that a court or agency may disagree with the conclusion you may reach, or multiple courts or agencies addressing the same issue may come to different conclusions.

The ultimate test of whether an individual is an employee or an independent contractor is the degree of control the company maintains over the individual. It is the right to control, rather than the actual control exercised, that is determinative. An individual will be deemed an employee if the company has the right to direct and control the manner and details of the individual's performance of his/her duties.

Federal Requirements. The Internal Revenue Service has established twenty factors to consider in determining whether an individual is an employee. These factors include just about any factor any other agency might consider and, as such, provides an excellent checklist. As stated in Revenue Ruling 87-41 the factors include:

? Instructions. An individual who is required to comply with other persons' instructions about when, where and how he or she is to work is ordinarily an employee.
? Training. If training is provided by requiring an experienced staff member to work with an individual, or if the individual is required to attend training sessions, this factor is evidence that the firm requires the services to be performed in a particular method or manner, i.e. control.
? Integration. To the extent that the success of the firm's business depends on such services, this evidences employee status.
? Services Rendered Personally. If the service must be rendered personally, this is an employment factor.
? Hiring, Supervising And Paying Assistants. If the individual is permitted to hire, supervise and pay other assistants pursuant to a contract under which the individual agrees to provide materials and labor, independent contractor status is indicated.
? Continuing Relationship. A continuing relationship with the individual indicates employment.
? Set Hours Of Work. The establishment of set hours of work by the firm is a factor indicating employment.
? Full-Time Required. An independent contractor is free to work when and for whom he or she chooses. If the individual must devote substantially full-time to the firm, this could be an employment factor because control over the amount of time the individual spends working impliedly restricts the individual from doing other gainful work.
? Doing Work On Firm Premises. If the work must be performed on the firm's premises, there is a presumption of control and this indicates employee status.
? Order Of Sequence Set. If an individual must perform services in the order of sequence set by the firm, this is an indicia employee status.
? Reports. A requirement that the individual submit regular progress reports to the firm indicates a degree of control.
? Payment By Hour, Week, Month. Payment by the hour, week or month generally points to employment, provided that the method of payment is not just a convenient way of paying a lump sum agreed upon as a cost of a job. Payment made by the job or on a straight commission generally indicates independent contractor status.
? Payment Of Business And/Or Traveling Expenses. If the firm pays the individual's business and/or traveling expenses, employee status is indicated.
? Furnishing Of Tools And Materials. Furnishing tools, materials and other equipment tends to show employment.
? Significant Investment. If the individual invests in the facility, equipment or business, contractor status is indicated.
? Realization Of Profit or Loss. If the individual can realize a profit or suffer a loss as a result of the services provided, contractor status is indicated.
? Working For More Than One Firm At A Time. If an individual performs more than de minimis services for a multiple of unrelated persons or firms at the same time, independent contractor status is indicated.
? Making Service Available To General Public. The fact that an individual makes the services available to the general public on a regular and consistent basis indicates a contractor relationship.
? Right To Discharge. The right to discharge an individual at will is a factor indicating employment. An independent contractor typically cannot be fired if the independent contractor produces a result that meets the contract's specifications.
? Right To Terminate. If the individual has the right to end his or her relationship with the firm at any time without incurring liability, that factor indicates an employment relationship.

California Requirements. In California, many of the same factors will be considered, primarily to establish a sufficient "right to control" denoting employee status. (California Labor Code Section 2750.5, entitled "Proof of Independent Contractor Status"). Additional standards are found in Section 10.51 of the Department of Industrial Relations, Division of Labor Standards Enforcement, Operations and Procedures Manual. Both California's Labor Commissioner and Insurance Commissioner use these for determining when an individual is an independent contractor for wage-hour, workers' compensation, unemployment and disability insurance coverage. The standards are relatively similar to the IRS list.

? The right to control the manner and means of accomplishing the results desired. This is the most important factor. If the employer has the right to exercise complete control, the relationship is one of employer-employee. The significance of the other factors will vary depending on the extent to which they evidence the right to control the manner and means by which the desired results are accomplished.
? The right to terminate the relationship at will.
? Whether the person performing the service is engaged in a distinct occupation or business. If the person performing the service is engaged in a separately-established business distinct from that of the firm, it evidences contractor status.
? Whether the work usually is done under the direction of the firm or by a specialist without supervision. Where the work is customarily subject to extensive supervision, an inference of employment is created.
? The skill required in the particular occupation. Unskilled labor is usually supervised. If a person is performing services which require little or no skill or experience, an inference is created that such person is an employee.
? Whether the firm or the person performing the service supplies the instrumentalities, tools, and the place of work.
? Whether the person performing the services has the right to hire and terminate others.
? The length of time for which the person is to perform the services.
? The method of payment, whether by the time, a piece rate or the job.
? Whether the service are a part of the regular business of the employer.
? What the parties intend the relationship to be.

Due to the considerable exposure for misclassification, firms are well-advised to analyze the job or service to be performed in light of these factors prior to engaging workers as independent contractors.