The duck test: If they look like employees, they may not be independent contractors
This article is based on the Evaluating and Engaging Independent Contractors Checklist, one of more than 65,000 resources available through Practical Law and Practical Law Connect.
Engaging independent contractors can be a good business decision, but it can also expose the company to additional legal risks. If an employer classify workers as independent contractors but essentially treats them as employees, the company potentially could be liable for back pay (including unpaid overtime compensation), benefits, taxes, and worker’s compensation, among other legal obligations.
However, determining who is an independent contractor and who is an employee is not always clear, because no universal standard applies. Instead, it may be helpful to think of “the duck test.” That is, if your independent contractor walks, talks, and looks like an employee, he or she well very be an employee under the law.
In this article, we’ll provide some practical tips for how to structure your relationship with a contractor so you can have greater confidence that you have not violated applicable law by mischaracterizing the relationship.
Best practices for engaging contractors
First, a caveat. No one factor is dispositive and any one of these best practices alone is not likely to be enough. However, taken together, they may help tip the scale toward ensuring that your contractors are classified correctly.
- Use an independent contractor agreement to establish the terms of the working relationship.
- Require independent contractors to complete a Form W-9, not a Form W-4 that is used for employees. Do not complete a Form I-9 for contractors.
- Pay contractors by the project or by an agreed-on flat fee at regular intervals, not by the hour, week, or month. Companies should require contractors to submit invoices and should pay those invoices from accounts payable, not payroll. Companies must issue a Form 1099-MISC to any independent contractor paid $600 or more in a particular year.
Procedures and guidelines
- Do not reimburse independent contractors for business expenses. A contractor’s ability to manage expenses and set the fee for their services supports a finding that the contractor is economically independent of the company.
- Do not provide contractors with employee-type benefits like health insurance, paid vacation, paid holidays, sick leave, and retirement benefits. Require contractors to affirmatively waive their right to those benefits.
- Do not schedule hours or days of work for contractors or their employees.
- Avoid requiring uniforms, name tags, grooming standards, and similar workplace requirements typically imposed on employees.
- Make ID badges and building access cards for independent contractors different from the ones issued to employees.
- Issue separate guidelines for independent contractors, vendors, and other third parties instead of providing them with a copy of the employee handbook.
- Limit training (if any) to information about working on the employer’s premises, including entry and exit procedures, access to computer systems, and the anti-harassment policies applicable to independent contractors, vendors, and other third parties.
- Do not invite contractors to employee-only events or meetings.
- Do not provide independent contractors with company business cards.
- Do not give independent contractors company job titles.
- Deal with performance problems as contract modification or breach issues, not as disciplinary issues.
- Determine if the company’s competitors classify similar workers as employees instead of independent contractors.
Nature of work
- Avoid using former employees as independent contractors or having independent contractors do the same work as employees.
- Avoid using independent contractors to perform work that is integral to the business.
- Do not allow independent contractors to manage company employees.
- Avoid independent contractor participation in the hiring, discipline, or termination of company employees.
- Keep independent contractor files with vendor files, not employee files.
- Do not assume industry practice satisfies the requirements for independent contractor classification. Entire industries (construction, for example) are often the target of enforcement efforts.
- Use caution when policies, such as headcount freezes, could result in managers using independent contractors to fill open positions.
- Regularly audit the company’s independent contractor arrangements and template agreements.
These are but a few steps you can take to increase the likelihood that your independent contractors pass the "duck test" and are not actually misclassified employees. For a more complete treatment of this issue, please read the Practical Law resource: Evaluating and Engaging Independent Contractors Checklist found in Practical Law.
Check out Practical Law Connect from Thomson Reuters, the legal know-how solution built by and for in-house counsel.