If an employer has the right to control what work an individual does and how,
that individual must be treated as an employee. That holds true even if the
employer has a contract with the individual, establishing an independent contractor
What happened. Randy Hill and Ernest Blake worked as long-haul truck
drivers for Time Auto, under separate independent contractor agreements with
the company. Neither driver was allowed to perform work for individual profit
in between jobs for Time Auto;
both had to wait for a Time Auto dispatcher to assign work to them.
Both drivers also had an agreement with the company to lease equipment. Hill
and Blake were each required
to make a $10,000 down payment
on the equipment, as well as "substantial monthly payments"
after that. The lease agreements stated that Hill and Blake would
lose their investments if they were terminated for inadequate performance. The
independent contractor and lease agreements could be
terminated at will without cause.
Time Auto terminated its contracts with Hill and Blake on the basis of the
drivers' involvement in activities of Local 299, International Brotherhood
of Teamsters, AFL-CIO. However, an administrative law judge found that the two
actually employees of Time Auto,
and in terminating them because of their union activities, the company was in
violation of the National Labor Relations Act. A majority of the National Labor
Relations Board affirmed that decision, and the company appealed to the U.S.
Court of Appeals for the 6th Circuit.
What the court said. On appeal, Time Auto argued that:
- Its relationships with Hill and
Blake were structured as independent contractor relationships.
- Hill and Blake were allowed to
hire drivers to work for them.
- Payments were made to the
drivers' corporationsnot to
them as individuals.
- They were paid on a percentage basis (so they had an opportunity
for profit and loss).
- They had to pay the costs of
operating, maintaining, and repairing their tractors and trailers.
The appeals court affirmed the National Labor Relations Board's decision,
saying, "substantial evidence supports the Board's
determination that Time Auto asserted such control over Hill and Blake as to
make them its employees."
Time Auto Transportation, Inc., and Time Auto Transport, L.S. v. National
Labor Relations Board, Nos. 03-1194/1271, U.S. Court of Appeals, 6th Cir.
Employers do not pay employment taxes for independent contractors and do not
withhold federal, state, and local taxes from payments made to independent contractors.
Independent contractors are not included in an employer's benefits programs,
and they are not eligible for unemployment insurance benefits. They are also
exempt from wage and hour and employment discrimination laws.
IRS has guidelines to assist employers in correctly identifying and classifying
- "Reasonable basis" test. This test provides a "safe
harbor" to employers based on existing government or court classifications
of workers in a particular business or industry.
- The common-law test. This test is based on the "right to control"
the work that is performed. If the employer controls the work, an employment
relationship exists. Conversely, if the worker controls the work, the relationship
can be classified as that of an independent contractor.
What to Remember
If you work with independent contractors, here are some steps to take to ensure
- Review the current status of positions. Even though certain positions
may have been classified as an employee or independent contractor status in
the past, working arrangements typically change over time.
- · Use IRS checklists as a guide. The Internal Revenue Service
has created checklists for determining employee status and for identifying
indicators of independent contractor status.
- Look at the big picture. No one indicator of independent contractor
status is determinative. However, the all-important issue is who has the right
to control the work as to when and how it is completed. In this case, the
appeals court noted that certain factors suggested an independent contractor
status. For example, "? Hill and Blake paid for their own expenses,
received no company benefits, and could hire drivers to work for them,"
but those factors didn't outweigh the "substantial evidence"
that Hill and Blake were employees of the company, the court said.