Independent Contractor Compliance Blog

What’s an independent contractor? I just want a simple answer!

Common laws and statutory laws that determine who is an employee or independent contractor are not that simple.  There is not a magic pill to prescribe to make someone an IC, or a formula where “If you do [this] you have an IC.”

Whenever I give a seminar on this topic there is invariably someone who asks, “I’m safe, if I make sure my ICs do…?”  These single factor “magic pills” or “formulas to make an IC”, just don’t work. 

Why?  Answer: Because there are “Drop Down” considerations when deciding who is an employee or independent contractor that only experts are aware exist.

Maybe an example will help explain this better.

Equipment.  Everybody knows that an IC typically provides his/her own equipment for the job, whereas an employee does not.  Also, that equipment is considered an investment in the ICs own business and that having such an investment in equipment supports the ICs status.  One legal theory, you may be are aware of, is that when a client company provides equipment there is an implied right to control how that equipment will be used, which then speaks to Direction and Control (The Primary Factor).

However; the type of equipment, the cost of the equipment, and the profession in which it is being utilized will determine how much weight this factor will have in deciding Employee or IC?

Consider a software engineer you engage to design and implement a new software package for your company.  He brings his own laptop, or maybe uses his own desktop from home.  Courts look at this from two perspectives:

1. Today everybody owns a laptop and/or a desktop computer.  Having one is not unique.  You would have it if you were an employee or an IC.
2. The dollar amount to purchase a laptop or desk top is not sufficient to create an investment in a business.

So equipment in this case will not support IC status for the software engineer.

Now consider a well driller you engaged to drill a well for water on that retirement property on which you plan to build a retirement home.  He has invested five hundred thousand dollars in the rig (maybe mortgaged with a bank).  Courts and government agencies will probably look at this as:

1. $500 thousand dollars is considered a substantial investment even in today’s inflated economy.
2. This equipment takes special skills to use and you won’t have the expertise or authority to tell him how to use the equipment while the well is being drilled.

In this case the equipment will support an IC.

Hang on. It gets more confusing.

If you’re hiring a well to be drilled for your retirement home which is not part of your business.  Courts have fairly consistently supports an IC status for work done for non-business purposes.

But what if you are a drilling company?

If you operate a drilling business and engage a driller, who has his own drilling rig, it becomes a different situation.  Is he  really working within the confines of your business operations or his own?  The fact that he has a drilling rig of his own will hold some weight, but not as much as if you were not in the well drilling business yourself.  When he drills that well, he’s serving your clients-not his own.

It can be more complicated-does he really have his own drilling rig? 

Courts (and government agencies, who are very respondent to court decisions) will want to know: 

• Does he really independently own the equipment?
• Does he hold full title?
• Is he buying it and making payments?
• If so, who is he buying it from-the client company he works for?
• If from a finance company, did the client company help secure the loan?
• Is he leasing it from the client company, or a subsidiary of the client company?
• Can he use the equipment to drill for other companies-even competitors-or for other jobs he finds on his own time?
• If he’s buying or leasing from the client company, how are payments made-deductions from the payments he receives for working on jobs?
• Does he get an equipment allowance-making it just an accounting trick?
• When he leaves the company’s service must he return, or resell, the drilling rig?  Does he actually get cash payment for selling it back?
• Can he sell it to someone else if he wishes?
• Even though he “owns” the rig, are there policies, maintenance schedules and approved procedures for the rig, enforced by the client company?

There are other “Drop Down” issues to consider, but you can see how complex this becomes just for the single factor: “Does he have his own equipment?”

There are many factors and “Drop Downs” to consider

The IRS has the Three Elements of Law, broken down into the 20 Factors of Common Law.  In California, EDD takes the same issues and breaks them down as the “Primary Factor,” supported by the ten “Secondary Factors.”  Each of these factors has their own “Drop Down” considerations.

The really good attorneys, judges and government auditors who know how to apply the rules to real life have been doing it for years, in thousands of cases and know when to ask the “Drop Down” questions and how much weight to give them.

These people are experts – not Weekend Warriors.