Making Sure Independent Contractors Are Not Employees in Disguise

Engaging independent contractors rather than hiring traditional employees can offer significant benefits, ranging from increased flexibility to cost savings. But the arrangement is not without risks, particularly regarding compliance with wage-and-hour laws and other regulations. 

Among the advantages of independent contractors for a business are these: 

• They can be engaged for specific projects — This flexibility enables businesses to scale their workforce up or down as needed, without committing to the ongoing obligations associated with permanent employees.
• They offer ready access to expertise — Rather than hiring an employee and investing in training and professional development for niche skill sets, companies can bring in contractors with precisely the qualifications required for a given project. 
• They avoid significant costs and administration — There is no requirement to provide them with benefits such as health care, retirement contributions, paid leave or other perks. Onboarding, timekeeping and HR management are streamlined.

However, use of independent contractors carries certain risks. Government agencies such as the U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS) scrutinize the classification of workers as independent contractors. Misclassifying employees can expose businesses to significant liability, including back pay for wages, overtime, benefits, unemployment compensation and tax penalties. This scrutiny is increasing as the gig economy expands and remote work becomes more commonplace.

Regulators examine the degree of control a business exercises over a contractor. If contractors are working exclusively for one company, following set hours or being directed in detail about performing their work, regulators may consider them employees. Other red flags include providing contractors with company equipment, integrating them into everyday business operations or setting ongoing expectations rather than project-based objectives.

Arizona regulators use a common law test to determine whether a worker is an independent contractor, considering such factors such as:

• The degree of control over their control over the work
• Whether the work is part of the regular business of the employer
• Whether the worker can work for other companies simultaneously
• Who provides tools and equipment
• The method of payment (hourly vs. per job)

For workers’ compensation purposes, A.R.S. § 23-902 imposes more precise definitions of who is or is not an independent contractor. It also allows a business to execute a written agreement that creates a rebuttable presumption of an independent contractor relationship.

A skilled contracts attorney with knowledge of employment law can help you prepare an independent contractor agreement that clearly outlines the nature of the working relationship, emphasizes the contractor’s autonomy, specifies project-based deliverables and avoids terms that imply an employment relationship. A well-crafted agreement also protects confidential information from competitors to whom the contractor might offer his or her services.

At the Law Offices of Donald W. Hudspeth P.C. in Phoenix, we understand how important are independent employment contracts for a company’s success. To learn how we can craft an effective agreement for you, call us at 866-696-2033 or contact us online.