Is Your Independent Contractor Really an Employee?

There are many benefits to retaining an individual’s services as an independent contractor (also known as a “1099 contractor”) rather than as an employee. As examples, these benefits include avoiding the obligation to provide health and other benefits generally offered to employees, avoiding the payment of overtime, avoiding the applicability of certain labor laws, etc.

From a liability standpoint, one significant benefit of an independent contractor relationship is that an employer is generally not responsible for the tortious conduct (e.g., negligence) of an independent contractor (however, a company may be contractually responsible to its customer for the independent contractor’s performance). This is largely because an independent contractor is retained by a company to perform certain work for another according to his own means and methods, free from control of the company in all details connected with the performance of the work.

In contrast, in an employer-employee relationship, the employer is generally liable for the conduct of its employee in the scope of his employment under the doctrine known as respondeat superior. That doctrine imposes “vicarious” liability on the employer for tortious acts stemming from a relationship that is considered employer/employee (or master/servant) in nature.

In order to realize the legal benefit of retaining an individual as an independent contractor, companies need to understand the legal distinction between an independent contractor and an employee. If the individual is labeled an “independent contractor,” but is, in effect, acting as an employee, courts will consider him to be an employee. In that event, the doctrine of respondeat superior will apply and the company’s protection from vicarious liability will be lost.

The distinction between an employee and an independent contractor is determined by the right of control and supervision exerted by an employer. There are a number of subsidiary factors that may be considered in the analysis of the relationship; however, the primary factor is the right of control and supervision. When this factor is absent, the individual will likely be considered an independent contractor. In this regard, courts will examine the extent to which the employer controls how the individual accomplishes his work. In a true independent contractor arrangement, the person is tasked with a particular job, and is free to determine the method and/or means by which the job is accomplished, with little supervision except that which may be necessary to secure performance of the contract according to its terms. In contrast, in an employer/employee relationship, the employer will supervise the individual in performance of the work, and provide direction as to how the person accomplishes the objective work.

As one Maryland court put it: “To have an employment relationship, the ’employer’ must have some ability, should he care to exercise it, to tell the ’employee’ what to do and how and when to do it. If there is not this minimal power of control – if the worker’s agreement is to perform the work ‘according to his own means and methods free from control of his employer in all details connected with the performance of the work except as to its product or result’ – the worker is deemed to be an independent contractor and not an employee/servant.” L.M.T. Steel Products v. Piersen, 47 Md. App. 633, 636 (1981).

It should be emphasized that the foregoing generally discusses the employer-independent contractor distinction for purposes of understanding the company’s protection from vicarious liability for the tortious conduct of the individual under the doctrine of respondeat superior. The employee-independent contractor distinction can be significant in other respects as well. For example, if an independent contractor is considered by to an employee by the Internal Revenue Service or the Department of Labor, the company can be responsible for additional taxes, wages, overtime pay, etc. under federal laws and regulations implemented by those agencies. In making the legal distinction between and independent contractor and an employee, those agencies may apply slightly different factors. For these reasons, prior to establishing an independent contractor relationship, the nature of the contemplated relationship should be fully understood and an appropriate written agreement setting forth the terms of the relationship should be established.