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Contractor vs. Employee
The employment relationship is a contractual one between an employer and a worker who can be either an employee or an independent contractor. As the following case illustrates, it's not always easy to determine the legal propriety of the relationship.
Acme Court Reporting Co. Inc. employs eight professionally trained and experienced court stenographers/reporters. Consistent with the industry standard, all of the reporters are treated as independent contractors. They are all required to supply their own computer-aided transcription (CAT) hardware and software. They also supply their own vehicles and vehicular insurance for transportation to and from stenographic jobs, which are assigned at the sole discretion of the owner/manager of the company. They are not permitted to refuse any assignment and are also required to be in the company office during the day so they can be available to respond to "call-in" jobs. They are not permitted to work for any other court-reporting firm. Acme also furnishes steno note pads and copy paper to print out copies of deposition and trial transcripts and reporters also have use of the company's copy machine, telephones and other office supplies at no cost to them.
Jobs are billed by the company, which charges its clients an "appearance fee" for each job and a specified "page rate" for each page of transcript produced by any of the reporters. The reporters are paid a 75% "commission" (75% of the appearance fee and total page charge) for each job they take. Certain expense reimbursements, such as long distance phone charges, postage, etc., are also billed to the clients, for which the reporters do not receive any commission. No withholding or taxes of any kind are paid by the company, nor are any additional benefits of employment provided.
Are the reporters employed by Acme properly classified as independent contractors?
When the employment relationship is one of employer/employee, the employer assumes several responsibilities not present when dealing with independent contractors. The employer is responsible for paying a minimum wage, withholding federal income taxes, Social Security and Medicare payments from the employee's pay and forwarding those sums to the U.S. government. The employer is also responsible for paying a matching amount to the government for Social Security and Medicare. Additionally, the employer is responsible for unemployment insurance premiums and, depending upon the number of employees, must pay for workers' compensation insurance. The employer is also responsible for complying with federal and state anti-discrimination laws.
In contrast, the employer is not responsible for withholding taxes or the payment of any taxes for independent contractors. In most cases, the employer is not required to provide workers' compensation insurance. When employing independent contractors, the employer can also avoid the additional costs of benefits of employment that are commonly provided to employees, such as sick leave, vacation, health insurance, etc.
There are obviously several benefits to Acme in classifying the reporters as independent contractors. But misclassification and the avoidance of many of the duties noted above have serious risks, i.e. : the payment of penalties and interest on sums not paid to the government; payment of medical expenses and other workers' compensation benefits to an injured reporter who should have been covered by workers' compensation insurance; and, potential liability to other parties for the negligence of a reporter, such as causing an automobile accident while enroute to a job assigned by Acme.
Courts look at several factors to determine whether a worker occupies the status of employee or independent contractor. Among those factors are: the relative investment in equipment, supplies, etc. necessary to complete the contracted work; whether the employee assumes the risk of any monetary loss in accepting the work; the degree of skill and initiative required of the worker; the permanency of the relationship between the parties; and most important, the right of control the employer has over the worker.
In many cases, the independent contractor will be hired for a specific job or series of jobs that are not normally an integral part of the employer's business. While the employer has the right to determine the adequacy of the finished product, he does not retain the right to control the manner in which the work is to be performed; that is generally left to the skill and initiative of the independent contractor.
In the Acme case, the reporters do have a significant investment in equipment, software and transportation costs. The actual work is generally left to the "skill and initiative" of the individual reporters. In contrast, the relationship is of permanent or at least long-term duration. Acme retains the right to control the workday of each reporter and the work in question is integral to the operation of Acme's business.
Because Acme exercises a significant amount of control over the reporters, including the prohibition to work for any other court reporting agencies, they are likely being misclassified. Because it is standard within the court-reporting industry to classify reporters as independent contractors, Acme may be able to avoid penalties on past taxes but will likely be responsible for its failure to make payments in the past, plus interest on all sums due when audited by the IRS.
Additionally, if one of the reporters is involved in an auto accident while driving to or from a job, Acme will likely be liable to other parties for all injuries and damages caused by the negligence of the reporter. Finally, if the reporter is injured in the auto accident, Acme may be responsible for paying all medical bills and other workers' compensation benefits.
As always, let the employer beware!
Ken Starr is a former trial attorney who specialized in employment law, EEO and ERISA claims. He is presently a mediator and arbitrator primarily in the labor and employment areas and teaches a graduate-level labor and employment law course at Webster University.
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