Category Archives: Independent contractors

NEW ARIZONA CASE EXPLORES COMPANY LIABILITY FOR THE ACTS OF INDEPENDENT CONTRACTORS

Control
  

def: the power to influence or direct people’s behavior or the course of events.

Because employers “control” the acts of their employees, courts hold businesses liable for employees’ conduct performed in the course and scope of their employment.  Example:  when a truck driver employed by ABC Trucking crosses a double yellow line and kills an oncoming motorist, the truck driver and ABC Trucking are both liable for negligence.

But what if that same driver is an independent contractor, not an employee of your company?  Or what if the driver is an independent contractor your family hired to move its furniture across town, or shuttle your kids between ball games?  Would you still be liable even though the driver was not your employee?

Equally important, what if you think you have an independent contractor relationship with a worker, but exercise too much control over their work and the person is deemed to be your employee?

The Arizona Court of Appeals tackled these questions last week.  Read on and gain a fingertip feel for how to hire and work with independent contractors in a way that does not make you liable for their mistakes

Image result for ARIZONA COURT

A FATAL ACCIDENT AND A LAWSUIT

In Santorii v. MartinezRusso, LLC, a RE/Max Professionals real estate agent was returning from a real estate sales appointment when the car he was driving crossed the center line and struck another man’s tractor-trailer.  Both men died in the collision.  The wife of the truck driver brought a wrongful death lawsuit against RE/Max Professionals alleging that it was vicariously liable for its agent’s negligence.

The specific issue in the case was whether real estate brokers should be held liable for their salespersons’ negligent driving.  The Court answered “no.”  But, in deciding this particular issue, the Court of Appeals made broad pronouncements which are applicable to all businesses.

THE COURT CONFIRMS THE APPLICABLE TEST TO DETERMINE IF A WORKER IS AN INDEPENDENT CONTRACTOR OR AN EMPLOYEE

The Santorii Court stated that the following criteria must be evaluated in determining whether an employer-employee relationship exists:

  1. The extent of control exercised by the master over details of the work and the degree of supervision;
  2. The distinct nature of the worker’s business;
  3. Specialization or skilled occupation;
  4. Materials and place of work;
  5. Duration of employment;
  6. Method of payment;
  7. Relationship of work done to the regular business of the employer;
  8. Belief of the parties.

The degree of control exercised over a worker is the main factor courts consider in deciding whether a worker is an employee.  The right to control is present when a company can control the details of how work is performed and can give specific instructions with the expectation that they will be followed.  Thus, where a  delivery truck driver struck a motorcyclist, the Arizona Supreme Court concluded that there were fact questions regarding whether the driver was an independent contractor or an employee when the delivery company:

  • designated pick-up and delivery times
  • selected the delivery route, and the manner in which the papers were to be delivered
  • could send a supervisor on the delivery route
  • could tell the driver when to add customers and follow specific customer requests

In yet another case, the Arizona Supreme Court held that an employer was not liable for the wrongful death caused by its traveling salesman because the employer had “no control or right of control” over the manner of the salesman’s travel.   The court recognized that under the contract between the employer and the traveling salesman, the employer may have had some control over sales procedures, but found that such control “would not justify an inference of any right to control the time, method or manner of the operation of [the salesman’s] automobile.” The court noted that evidence showing that the salesman could sell anywhere in the United States, sold other companies’ products, and essentially had full discretion over his own sales trips established the employer’s lack of control.

Applying the foregoing principles, the Santorii court ruled that the real estate agent was an independent contractor and, in turn, RE/Max Professionals was not liable.  Despite working exclusively for RE/Max Professionals for over a six-year period, the agent was a licensed professional who had nearly complete discretion in the time, manner, and means in which he traveled to meet clients.

In addition, the contract between RE/Max Professionals and the agent identified the agent as an independent contractor who was “free to devote” his time, energy, effort, and skill as he saw fit.  The agent was not required to keep specific hours, attend sales meetings, or meet any sales quotas, and although RE/Max Professionals provided optional office space, administrative services, sales leads, and training, the agent was charged a monthly fee for these services.  Moreover, there was no dispute that the agent chose the territory where he worked, created his own advertisements, prospected for clients, drove his own car, worked from his home office, worked purely for commission, and set up his own appointments.

TAKEAWAY:  TO AVOID LIABILITY, CAREFULLY DRAFT INDEPENDENT CONTRACTOR AGREEMENTS AND DO NOT EXERCISE TOO MUCH CONTROL

The Santorii decision does not mean that real estate companies are home free.   First, the decision was narrowly limited to assessing liability for agents’ driving a car (versus, for example, negligent business practices).  Second, had the brokerage company exercised more control over its agent, it easily could have been found liable for the agent’s negligence. 

Santorii is a strong reminder for businesses and others to thoughtfully consider their relationships with independent contractors.  This means (1) having counsel draft independent contractor agreements that, if challenged, are defensible and supportable; (2) making sure that your business does not exercise too much control over your non-employee workers; and (3) having adequate insurance if you fail to heed Nos. 1 and 2.

Getting sued is not the only problem that can befall companies who misclassify employees as independent contractors.  The U.S. Department of Labor and IRS are always on the lookout for businesses that misclassify workers.  For more on this topic, read this article.

For help on drafting independent contractor agreements or for further information on other employment law topics, contact Art Bourque at Bourque Law Firm.

INDEPENDENT CONTRACTOR VERSUS EMPLOYEE: MAKING THE RIGHT CHOICE

It is critical that business owners correctly determine whether individuals providing services to them are employees or independent contractors. In most cases the choice is easy: workers neatly fit within one category or the other. This edition of the HR Law Insider focuses on what to do when the choice is not so easy – when businesses need to carefully evaluate the pros and cons of their decision. As discussed below, making the wrong choice can be costly.

PROPER CLASSIFICATION: THE QUESTIONS EVERY BUSINESS MUST ASK

An employee is “a person in the service of another under any contract of hire, express or implied, oral or written, where the employer has the power or right to control and direct the employee in the material details of how the work is to be performed.” In contrast, an independent contractor” is one who “in the exercise of an independent employment, contracts to do a piece of work according to his own methods and is subject to his employer’s control only as to the end product or final result of his work.”

Companies must evaluate the following before deciding whether a worker should be classified as an employee or as an independent contractor (or reclassified if classified incorrectly):

  • Does the company have the right to control when, where and how the worker performs the job.
  • Does the work require a high level of skill or expertise.
  • Does the employer furnish the tools, materials and equipment for the job.
  • Is the work performed on the employer’s premises.
  • Is there a continuing relationship between the worker and the employer.
  • Does the business have the right to assign additional projects to the worker.
  • Does the business set the hours of work and the duration of the job.
  • Is the worker paid by the hour, week, or month rather than the agreed cost of performing a particular job.
  • Does the worker hire and pay assistants.
  • Is the work performed by the worker part of the regular business of the company.
  • Is the worker engaged in his/her own distinct occupation or business.
  • Does the company provide the worker with benefits such as insurance, leave or workers’ compensation.
  • Is the worker considered an employee of the company for tax purposes (i.e., the company withholds federal, state and Social Security taxes).
  • Can the company discharge the worker.
  • Do the worker and the company believe that they are creating an employer-employee relationship.

Answering the foregoing questions typically yield a clear result: the worker is either an employee or an independent contractor. However, in many cases, the result is anything but clear. In such cases, companies should consult legal counsel to discuss the facts and the pros and cons regarding the important decision to be made.

IMPROPER CLASSIFICATION: PENALTIES AND PAIN

Improperly classifying an employee as an independent contractor can result in significant IRS tax penalties for failure to pay payroll, social security, and medicare taxes, among other things.

Misclassifying an employee as an independent contractor can open a can of worms with the other government agencies, particularly if an agency believes that the business misclassified the employee solely to avoid providing government mandated benefits.

For example, in most instances employees have significantly more rights than independent contractors: overtime must be paid to non-exempt employees; employees are protected by the EEOC enforcement of Title VII and the Americans with Disabilities Act; employees are protected by the Department of Labor and OSHA laws; and employees have a number of other rights in the workplace which do not apply to independent contractors (e.g. workers compensation insurance and unemployment insurance benefits).

 CONCLUSION

Classify workers correctly by evaluating — at the outset — their tasks and relationship to your company. Once you have performed a proper, careful, and supportable analysis, consult counsel if there is no bright line answer.

In future editions of the HR Law Insider, I will address easy ways to bolster any classification decision such that it will better withstand government or third party (e.g. plaintiff’s lawyer) scrutiny. This can be done via, among many other things, a good independent contractor agreement or by specifically delineating projects to be performed.

In the interim, sit back and enjoy a blast from the past about workin’ for a livin’. https://www.youtube.com/watch?v=9N2CANatVYQ