by Bob Skousen (This article was first published in the Inland Empire Business Journal October 2002 issue)

In the modem commercial world, the use of independent contractors is commonplace. Most employers assume that an independent con­tractor is not their employee. Nevertheless, the rules determining who is and who isn’t an employee can be complicated. The conse­quences of treating someone whom you think is an independent con­tractor-but who is in fact your employee-can be severe.

These consequences can include back wages and benefits, penalties, liability for worker’s com­pensation damages, and liability for all of the independent contractor’s employees. In certain cases, govern­mental audits have imposed penal­ties in the hundreds of thousands of dollars. Employers should also be concerned if an independent con­tractor receives its sale source of income from the employer. This sin­gle income source can be a red flag that will cause a government audit and in turn result in the imposition of such penalties.

In determining whether a person is an independent contractor the label the parties use will not be considered determinative. Moreover, the burden of proof will be on the employer to prove that the independ­ent contractor is not an employee. There are many factors that are used to determine who is and isn’t an employee. Some of these factors are as follows:

• The right to terminate the rela­tionship at will. This factor implies the existence of employer-employee relationship.
• The right to control the manner and means of accomplishing the results desired. This is the key test The more control that is exercised, then the more likely the independent contractor will be found to be an employee.
• The alleged independent contrac­tor’s opportunity for profit or loss depending on his managerial skill. If the opportunity for profit or loss is significant, then the person is likely to be considered an independent contractor.
• The alleged independent contrac­tor’s investment in equipment or materials required for his task, or his employment of helpers. The greater the investment in equipment or material, the more likely the person will be held to be an independent contractor.
• Whether the service rendered requires a special skill. If special skills are required, then this may indicate that the person is an inde­pendent contractor.
• Whether the person performing the services supplies the instrumen­talities, tools, and the place of work. If the contractor supplies the instru­mentalities, tools, and the place of work, then he or she is likely to be held to be an independent contractor.

Employers who wish to avoid problems should be able to answer “yes” to the following questions:

Is there a written agreement between the contractor and the com­pany?

Does the contractor control the manner, means and methods of pro­viding the product or the service?

Does the contractor provide his or her own tools and materials?

Does the contractor determine the times and places to perform the con­tract?

Is the work to be performed by the contractor distinctly different from the work to be performed by the employees of the company?

Does the contractor have a con­tractor’s and business license?

Does the contractor bill or invoice the company for his or her services?

Is the contractor free to subcon­tract his or her services to others?

If any answers to the above ques­tions are “no,” the employer should contact legal counsel to have the con­tractor’s status as an independent contractor reviewed.

Robert J. Skousen, Esq. is the chief execu­tive officer of Skousen & Skousen in Los Angeles. For more than 35 years Skousen & Skousen has embodied the highest standards a/legal excellence and integrity. The practice emphasizes labor and employment law, real estate, intellectual property, corporate trans­actions, securities, litigation, venture and technology, taxation, and estate planning.