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Employee vs. Contractor: Who Should You Hire?

This Article was published by YBAA Association of Yacht Sales Professionals, on their website on December 14, 2017.

Every business struggles with finding good help these days. We all know what questions to ask at the interview and every business person knows who is the right fit for their shop. Yet many potential employers do not grasp the intricate web that is employee-employer relations, its implications and consequences to the business. From a business perspective, a future employee is broken down into two categories, cost (what the worker will cost the business) and revenue (what that cost will buy the business). This is step one in making any decision on whether to employ anyone in the first place. However, when hiring a person, one must also consider the legal implications upon the business as a whole.

What is an employee? It is a person who is totally controlled by the business that employs him or her. This level of control allows the business, in theory, to structure and organize the daily activities that help maximize the business efficiencies and profits. Ironically, this level of control also poses the greatest amount of liability. In legalese, we call this the doctrine of respondeat superior, which is Latin for “let the master answer”. The translation means that as a business, you are liable for any acts committed by the employee.

In law, the Courts love tests to determine if a doctrine applies. In the case of employer liability from employee’s actions, the test can be summarized as two parts. One, was the worker acting under the control of the business (e.g. was this during business hours)?. Two, was the worker in the scope of employment? Obviously, part two is where all the litigation arises. The Courts have been very broad in what they determine to be “scope” and actions taken while working. The general rule of thumb is that if the employee is on the clock, everything is likely in scope of employment, from what they say to what they do. There are cases where employers were liable for their employees physically assaulting individuals, even though everyone can agree that an employee is not hired to fight clients. This is the downside of all that control. But do not worry, there is an alternative available.

This alternative comes in the form of a relationship status from the tax code, known as, 1099. It is a number from a tax form that business uses to inform the IRS of expenses. Section 7 of the form refers to non-employee compensation, or the individual is not an employee, but an independent contractor. Why does this matter? Well the law allows employer to use independent contractors to give themselves a level of protection from the respondeat superior doctrine.

The biggest difference between an employee and an employer is who they “work” for. We all can agree that a contractor is retained by a business to work towards the business’ goals. However, in law, it is assumed that a contractor is actually working for themselves, rather than the business. This rationale is summarized in the amount of control which is exercised by the business upon the individual. An employee is fully controlled by the business. An independent contractor, as the name suggests, is independent of the business. Since the contractor is independent from the business, the business cannot be held liable for their actions. They are independent after all.

The best example of these relationships are the shipping companies. Every FedEx, or DHL truck you see is an independent contractor. These shipping giants have pioneered the law and protections whcih are given to business contractor relations. Yet FedEx or DHL exercise control over their respective drivers and trucks. The drivers all wear the same uniform, the trucks all look identical and the manner of your interaction with each contractor is more or less the same from driver to driver. This level of control allows FedEx or DHL to maintain a status quo among all the various contractors they retain cross the United States. Yet this level of control can also make an independent contractor an agent of the business.

Let’s take DHL as an example. In a Texas case, Del Pilar v. DHL Global Customer Solutions (USA), Inc., 993 So.2d 142 (Dist. Ct. Fl 2008) one of these independent drivers was involved in a car collision. DHL was named as a defendant and the Court was asked to apply the doctrine of respondeat superior. DHL’s first defense was that the driver is an independent contractor and therefore no liability may be applied to DHL. The lower Court agreed, however; on appeal, the Appeals Court sent the case back to the lower Court with instructions to review the level of control exerted by DHL in this particular independent contractor relationship. The rationale behind the Court’s decision was that DHL, in this case, not only mandated what the contractor wear or drive, but also supervised the daily operations of the contractor and maintenance of the vehicles. This level of control suggested that the driver was actually an agent of DHL and not an independent contractor. As a business, you are responsible for the actions of your agents as well.

So how does one distance themselves sufficiently from their independent contractors so that they do not appear to be employees or agents? Just because you have a contract does not mean you are fully safe from the analysis. FedEx or DHL all use contracts with their drivers, but they also exert control over them.

To help in the analysis of employee vs contractor, the IRS uses a guide. There are three categories which are considered by the IRS for tax purposes, and by the Courts, to determine status of an individual worker. Those categories are: Behavioral, Financial, and Relationship. The Behavioral category focuses on control used by the business on the worker. The more control, including training, the more likely the person will be considered an employee. The less control and freedom to achieve the task at hand, the more likely the individual is a contractor. The second category is easy as “Financial” refers to how the worker is paid. Any W2 worker is an employee, any 1099 is a contractor. However, any W2 type payment (such as bonus, benefits, insurances, etc.) will likely make the contractor appear as an employee. Remember, contractors cannot be treated like employees so they cannot enjoy the benefits of being an employee. The last category is a bit tricky. “Relationship” status refers to nature of the business relationship between the worker and the business. A contract usually denotes contractor status, as well retaining an individual for a specific task. Yet many brokers have compensation packages which are really more akin to employment contracts. Also, the length of time of the relationship is a factor. Contractors are usually definite in time, employees are not. Yet, many independent contracts are renewed annually without any thought put to it (some even have self-renewing clauses).

As you see, there is no magic formula that makes a person an employee or contractor. Everything must be taken in connection to other things that the business is doing. Every relationship is different, every worker is different, every independent contract is different. The only “rule of thumb” is very simple: the more control, the more liability. That liability comes in various forms of overhead, such as taxes, benefits, insurance, etc., and liability for actions of employees. Alternatively, even exercising too much control over a contract may make them an agent, which for the doctrine of respondeat superior makes you liable for their actions as well.

Each case is different. Each worker is different. Each contractor is different. The question you must answer is how much control are you willing to give up.

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