The other day I was having lunch with a retired judge who had decided hundreds of cases over the issue of “employee vs. independent contractor” (IC). I asked him if in his experience, he found there was a common reason that stands out as to why consultants are found to be employees and not independent contractors.
I thought he would cite direction and control, or possibly risk of loss, or maybe even not having a clearly established independent business operation, but his answer surprised me. He explained to me that cases typically turned the corner for him when he realized the workers have no understanding of what an IC is. Usually, when misclassified consultants are asked why they believe they are independent contractors, they will often say something like “because that’s the way we set it up.”
I still wasn’t sure I understood his answer, so I asked him if that meant that he didn’t give much weight to the intent of the parties. He told me that the intent of the parties is considered in the final decision, but that he likes to know if consultants can articulate why they are not employees. If the full extent of their understanding is “it’s the way we set it up”’ and when pressed to explain why they are an IC they fumble for words, he immediately begins to think the consultant is misclassified.
He continued telling me that sometimes he intervenes in the questioning and asks if the consultant can articulate the difference between an employee and independent contractor. Another common answer he hears from misclassified workers is something like: “an IC receives a 1099, or an IC is responsible to pay his own taxes.”
Curiously I asked, “Are you looking for a legal argument here, a listing of legal factors, or citing case law?” He responded that consultants should be able to explain how they operate their own business — how they to get new clients, how they pay for their own expenses out of their income, how they decide which jobs to go after, set their own fees, how they hire a helper at their own expense to finish a job on time, maybe complain about their overhead costs.
Bottom line: judges pay attention to the way consultants paint a picture of an independent business operation.
Disclaimer: Given the general nature and context of this article, the material presented should not be relied upon or construed as either tax or legal advice. For specific information on recent developments, the effects of particular factual situations or of a particular law in regards to your business, or before making decisions based upon this presentation, you should obtain the opinion of a qualified expert.