Jan 08, 2018

Independent Contractor or Employee?

By: Allison Mann

Businesses can see major advantage in hiring workers as independent contractors, as opposed to employees. There are cost savings, including reduced costs for taxes, insurance, and employee benefits. However, reaping these benefits is not so simple as internally classifying a worker as an independent contractor.

There are specific laws regulating whether or not a worker qualifies as an independent contractor, or whether the worker is an employee. In North Dakota, the ND Department of Labor and Human Rights has the power to make determinations concerning whether a business is an employer, or whether services performed for the business constitute independent contractor work. The characterization of the services between the parties is not controlling.

Services performed for a business under contract for wages is considered employment unless the business can show that the worker is an independent contractor using the “common law” test. The common law test contains twenty factors based on North Dakota case law. This test focuses primarily on whether the business has the power to control the worker, not only as to the result to be accomplished but also as to the details and means by which that result is accomplished. It does not matter if the business actually exercises control, just that the business has the right to control. Factors include, but are not limited to whether the business provides instructions and training to the worker, how important the services rendered by the worker are to the operation of the business, the worker’s job flexibility, where the services are performed, and the manner of payment.

Application of the test is not an exact science. There is no certain number of the twenty factors that a business must meet to show it is an independent contractor, and some of the factors are more important than others. The test is very fact dependent, which is apparent after examination of relevant caselaw.

The North Dakota Supreme Court has reviewed worker classification issues on multiple occasions. One helpful case is BKU Enters. v. Job Serv. N.D. (In re BKU Enters.), 513 N.W.2d 382 (N.D. 1994). Here, the employer hired workers as vacuum salespersons. The workers were classified as independent contractors by the employer. The workers sold vacuums to customers using in-home demonstration, set their own hours, were not required to attend any special training, could set their own sales prices on the vacuums, and were not supplied with cars, phones, or office space. The employer gave the workers vacuums on consignment. When the workers made a sale, all checks were to be paid to the employer, which would pay all taxes and then remit the profit to the worker. The workers were required to perform sales personally, were provided business cards and brochures by the employer, and did not make their sales services available to the general public. Either party could terminate the sales contract without liability upon two days’ notice. Job Service ND made a determination that the workers were employees rather than independent contractors, and the employer appealed to the Supreme Court for review. The Supreme Court affirmed Job Service’s decision. It first found that the majority of the twenty factors in the common law test supported a finding that the workers were independent contractors. However, the Court determined that, even though the workers were given substantial leeway, the employer retained the right to direct and control the workers based on the facts above.

Misclassification of workers as independent contractors carries with it negative consequences. A business could find itself responsible for the payment of back taxes, penalties, and previously unpaid benefits. If any specific questions regarding worker classification arise, it is recommended that competent legal counsel be consulted.

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Reprinted with permission from an article submitted for publication in the January, 2018 Southwest Area Human Resource Association newsletter.