Hiring and the Law —Independent Contractor Versus Employee? (2)

Devora L. Lindeman, Esq., Partner at Greenwald Doherty LLP, is providing us with insight and information regarding the hiring process. Ms. Lindeman is a management-side employment lawyer and has exclusively represented managers and companies in federal and state agencies and courts with regard to their labor and employment needs for many years.

Questions addressed to Ms. Lindeman may be addressed in this column.

Hiring and the Law
By Devora L. Lindeman, Esq.*

Question: I need to hire a PR person, but I’d like to try out a candidate as an independent contractor for a while and then, if it works out, bring him or her on as a full time employee. Can I do that?

Answer: Generally, it is not prudent for a business to hire an individual as an independent contractor in a position for which you would hire an employee. Whether a person providing services for your company is properly classified as a contractor or an employee is not up to you—there are laws and regulations that govern that classification. When you get it wrong, a number of government agencies can impose fines, fees and penalties on your business, and this would best be avoided. For this reason, it may not be proper for this PR person to be an independent contractor.

Whether an individual is an independent contractor or an employee is going to depend on a number of factors, but the most important one is usually the degree of control you impose over when, where and how the person delivers services for your company. Think of someone you may hire to paint your house or apartment. You tell the painter you’d like him or her to be there on Tuesday. The painter says no. But he or she can be there on Thursday. The painter will tell you what you need to pay for the paint job. And, if you don’t like it, you can find another painter. The painter advertises painting services to the world at large and you found the painting company on Angie’s List or through a recommendation. That’s an independent contractor.

If you are going to tell the PR person that he or she needs to work Monday through Friday from [9:00][5:00], with some networking events in the evenings at which you will require attendance, that you expect the PR person to perform certain functions and attain certain products or deliverables, and that the salary is x . . . that’s an employee, not an independent contractor.

When you bring someone on board as a contractor for some number of months, and then transition them to employee status during the same calendar year, you will need to provide that person with a 1099 for payments as a contractor, and a W-2 for payments as an employee. When the IRS receives a 1099 and W-2 for the same person, from the same company, in the same year, that acts as a red-flag—one of those classifications was likely incorrect (and for the most part, it was the contractor portion). Additionally, the Department of Labor will be concerned because the company would not have paid unemployment insurance taxes, or workers’ compensation contributions, for the contractor portion of the person’s working time.

When the IRS or Department of Labor investigates a potential misclassification situation, they don’t just focus on that one individual. Rather, they will seek to investigate everyone who works for your company to determine whether those individuals were properly classified.

Additionally, the company could have further problems if the “contractor” does not work out. When you terminate the contracting situation, it is possible that the “contractor” could then apply for unemployment insurance claiming that he or she was an employee. Or if the “contractor” gets hurt on the job, and files a workers’ compensation claim, there will be issues because he or she will not be on the company’s worker’s compensation policy and you will be litigating that individual’s status.

Even if you have an independent contractor agreement saying the person is not an employee, Unemployment (or Workers’ Comp) will look to the reality of the situation and the degree of control the employer had over the individual’s work. Based on that, as well as on other factors, the agency will determine whether the person was really a contractor or if he or she was an employee entitled to the claimed benefits.

For these reasons, it is best to use the hiring process to make determinations about prospective applicants, rather than counting on a “trial period” as an independent contractor. The successful candidate for this PR position should be brought on as an employee, not a contractor. If the employment of this individual is not working out, the company can opt to performance manage the employee or swiftly let the poor performing employee go. Either option is likely less risky than treating someone as an independent contractor when he or she is really an employee.

*Ms. Lindeman is a Partner at Greenwald Doherty LLP, a law firm that exclusively represents businesses in all aspects of labor and employment law.  These columns are intended to be general information regarding the topic discussed and are not to be considered legal advice regarding a specific situation. Contact a management-side employment attorney familiar with the law of your jurisdiction for specific advice.  Ms. Lindeman is admitted to practice law in NY and NJ and may be contacted at DL@greenwaldllp.com.  She is under no obligation to respond to reader inquiries personally, but may answer general employment law questions through this column.

© 2011 Greenwald Doherty.  May not be reprinted without permission.

As the law varies in each area, please check with an attorney to ensure you are applying these tips within the law.

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