Employment Law and the “Contract Employee”

Do you want to know the best way to confuse an employment law attorney? Refer to someone who works for you as a “contract employee.” I recently attended a conference and listened to Colorado attorney Kevin Paul present an employment law update seminar. He expressed his confusion at this term and had every attorney in the room, including my colleague and myself, nodding their heads.

When we hear this term, as employment law professionals, we have no idea if the employer is talking about an employee or an independent contractor. What exactly is a “contract employee”? The difference between the two, i.e., contractors and employees, in the most clear and succinct manner I have heard yet, must again be credited to Mr. Paul: “You hire employees for a wage or salary to work for you for an indefinite period and you issue them a W-2. You retain independent contractors for a fee to perform a specific project within a specific time and you issue them a 1099.” Maintaining these distinctions protects your organization. Mixing the two is a recipe for “compliance salad,” i.e., disaster.

This is the general rule, but of course, it becomes more complicated. There are a number of federal agencies with their own regulations as to who is an independent contractor and who is an employee. On top of that, many states maintain their own unique statutes with language that varies ever so slightly from the next state. What is an employer to do?

What I have found most helpful is the Independent Contractor Checklist put together by the IRS. It is by far the most complete, and explains that any regulation or state law is effectively looking at three factors:

  • Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  • Financial: Are the business aspects of the worker’s job controlled by the payer? (These aspects include items like how the worker is paid, whether expenses are reimbursed, who provides tools and supplies, and many more.)
  • Type of Relationship: Are there written contracts or employee type benefits (e.g., pension plan, insurance, vacation pay, etc.)? Will the relationship continue indefinitely and is the work performed a key aspect of the business?

When you click on the words above, they take you to the applicable IRS page on the website where IRS more fully explains the concept. The next time you are thinking of having a “contract employee” work for you, call us first. We can help you sort out whether this is more properly an employee or an independent contractor. When you make the correct determination you can avoid lawsuits, state department of labor investigations, and letter from the IRS that you do not want to receive. For assistance with independent contractor classifications, state-by-state guidance, or auditing services, please contact your staff representative with the Council.