Rocco Cozza • October 4, 2021
An Analysis You Need to Understand
Over the years advising business owners, we have been asked this question all of the time. What is the difference between an independent contractor and an employee? I have found that a majority of business owners are improperly classifying their employee or contractors, which could lead to serious trouble down the road. The question is answered by looking at substance over form, i.e. the actual job, not what is put on paper.
If you browse the IRS website, you will find that the IRS sets forth a general rule for defining an independent contractor. The IRS website states “the general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” This is a very broad definition and can be subject to interpretation. Further, the IRS site states “you are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.” Again, this can be subject to interpretation.
The IRS does use a test to determine if someone is classified correctly. It is often termed the “right-to-control test” because each factor, roughly 20 factors in total, is designed to evaluate who controls how work is performed. Under IRS rules and common-law doctrine, independent contractors control the manner and means by which contracted services, products, or results are achieved. The more control a company exercises over how, when, where, and by whom work is performed, the more likely the workers are employees, not independent contractors.
A worker does not have to meet all 20 criteria to qualify as an employee or independent contractor, and no single factor is decisive in determining a worker's status. The individual circumstances of each case determine the weight IRS assigns different factors.
So as a business owner, how can you be sure that you are classifying your workers correctly to avoid any unforeseen legal issues? You must look at the facts of each situation, what the worker’s job actually consists of.
Some of the factors to consider are: who directs the person’s work? Does he/she have a boss or work independently? Do you provide the equipment needed for the job or does the worker? Does the worker have a set schedule with set meal/break times or do they come and go as they please? How are they compensated? Do they have a written contract with a start and end date? Are any benefits provided to them? Are they required to report to someone or just provide a finished product?
One example I like to use when trying to distinguish between an employee and an independent contractor is as follows: Let’s say you need your house painted. You hire a painter to do it. You tell the painter that they need to paint between 9:00am and 5:00pm, they can take an hour lunch and you will provide the supplies for the job. You will pay them for all hours worked. This painter will likely be deemed your employee. On the other hand, you hire a painter to paint your house. You pay $3,000 for labor and materials and only care that the job is complete in 2 weeks. This painter will likely be deemed a contractor. Please understand this is merely for examples sake and is in no way meant to opine on the painting profession.
As you can probably tell, this is a very gray area of the law, but one in which comes with high penalties if not handled properly. Whether you are employing independent contractors or employees is a factual question, a question that should be answered from the start to avoid long term trouble. Do not take this lightly. As a business owner, you should be working with competent legal counsel to help in the analysis and to save you money in the long run.
If you have any questions about this distinction, do not hesitate to reach out to us to schedule a free strategy session to ensure you are classifying your workers correctly. Click here to call now!
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the 5 d's of business - a must read for business owners
How Business Litigation Protects Companies From Costly Disputes Although there are many costs involved in doing business, disputes can take a particularly high toll on a company's finances. These disputes might involve contract breaches, copyright violations, premises liability lawsuits, allegations of fraud, and much more. The obvious strategy is to avoid these disputes at all costs. How does business litigation fit into this equation? Can a company use business litigation to strategically protect itself from disputes? These are questions you might want to explore with an experienced business litigation lawyer in Pittsburgh . Business Litigation Strategies Are Often Preventive in Nature Many business litigation strategies are preventative in nature. In other words, companies take effective, early legal steps to eliminate the chances of disputes and legal action at a later date. One example of this is an effective business contract. When drafted properly, a business contract leaves little room for litigation or any other disputes. Many contracts contain arbitration or mediation clauses. These clauses force parties toward private negotiations instead of the courtroom floor. This private “alternative dispute resolution” (ADR) process is inherently cheaper, faster, and more private than litigation. Once a dispute reaches the courtroom, companies must pay much higher legal fees. They also face longer timelines. One of the biggest downsides of litigation for companies is its public nature. Many companies desperately need to keep sensitive information out of the public eye, whether that includes baseless allegations, copyrighted material, trade secrets, or more. Private negotiations can be so quick that they can hardly be called “disputes,” and issues may be resolved in a matter of weeks. In an ideal world, these disputes never even happen in the first place. A strong contract lays out clear responsibilities and privileges for each party, leaving little room for misinterpretation. Another obvious way to avoid business litigation is by choosing appropriate business partners. Another preventative business litigation strategy involves liability waivers. Although these waivers are not as effective as some company leaders assume, they can nonetheless prevent many needless or frivolous lawsuits. Liability waivers are not appropriate or possible in all industries, but they could be worth considering for businesses that welcome large numbers of patrons onto their premises. Business Litigation Strategies May Involve Regulatory Compliance Sometimes, the biggest legal threat to a business is not a partner or a customer, but rather the government. Regulatory compliance is an incredibly important business litigation strategy, and company leaders should consider consulting with lawyers who understand the specific regulations and laws that pertain to their industries. For example, a company that deals with industrial waste or chemicals may need to become highly familiar with the environmental laws. Generally speaking, these laws become more restrictive each year. Company leaders may need to keep a close eye on regulatory changes to ensure compliance. A company in another industry might deal with a substantial number of employees. If this is the case, the company might need to pay close attention to labor laws, discrimination laws, religious rights, and many other factors that can lead to employment lawsuits. Poaching is another issue that could be concerning, as are non-compete clauses. An experienced business litigation law firm may be able to help companies draft policies and contracts that drastically limit the number of employment-based legal issues in the future. For example, a company might have to follow strict guidelines if it wants to create enforceable non-compete clauses in Pennsylvania. Organized Corporate Governance Can Reduce Litigation and Disputes Many business disputes stem from poor, disorganized corporate governance. When the working relationship between shareholders, partners, and the executive suite begins to fall apart, disputes are inevitable. Effective shareholder agreements and organized record-keeping can go a long way in making sure everyone is on the same page. Business Litigation Attorneys Can Help With Risk Assessment Sometimes, dispute prevention starts with risk assessment. If company leaders become aware of a potential legal risk, they might consider a different approach or business strategy. For example, a company might consider entering into a new contract with a supplier. A business litigation attorney may be able to conduct effective legal research into the new supplier to determine the legal risk associated with a new contract. Perhaps the new supplier tends to get into lawsuits with its partners. Maybe the company is already in the process of being sued. Whatever the case may be, an experienced lawyer can help company leaders assess the legal risks associated with certain actions before moving forward. Most Disputes Never Reach the Trial Stage Since parties usually understand the downsides of going to trial, they tend to settle their disputes outside of court. This means that disputes rarely escalate into trials. However, this does not necessarily mean that a privately settled dispute is not costly for a company. Instead, a settlement could be disastrous for a company. This is why it makes sense to negotiate effectively, even if you’re dealing with someone who agrees to mediation or arbitration. Business litigation attorneys are often effective negotiators, and they can guide both parties toward mutually beneficial outcomes. If the goal is to reduce the cost of a dispute, a lawyer can push back with effective counterpoints and counteroffers. If the goal is to gain as large a settlement as possible, your lawyer can advocate on your behalf and reject lowball offers. Can a Business Litigation Lawyer in Pittsburgh Help My Company? Whether you are facing a dispute or you simply want to avoid the possibility of legal action in the future, a business litigation lawyer in Pittsburgh may be able to help. These lawyers can help your company take preventative steps, such as creating effective contracts or liability waivers. A business litigation attorney can also help you if your company is already facing a serious dispute or lawsuit. Consider reaching out to Cozza Law Group, PLLC, at (412) 790-2789 to learn more about your next potential steps. You can also find us online .
