It is vital that you understand the distinction between independent contractors and employees. This affects you and your business.
You may genuinely believe that you have hired people to perform services for you as independent contractors. You may discover that by law they are considered employees and that you are liable for unemployment insurance contributions and interest.
Whether the relationship is one of employer-employee will depend on several factors. These include how much supervision, direction, and control you have over the services.
The Employer-Employee Relationship
The courts have found that no single factor or group of factors conclusively define an employer-employee relationship. Rather, all factors are reviewed to determine the degree of supervision, direction and control exercised over the services. Generally, an employer controls what will be done, i.e. the manner, means, and results.
An employer-employee relationship may exist if you:
- Choose when, where, and how they perform services
- Provide facilities, equipment, tools, and supplies
- Directly supervise the services
- Set the hours of work
- Require exclusive services (An individual cannot work for your competitors while working for you.)
- Set the rate of pay
- Require attendance at meetings and/or training sessions
- Ask for oral or written reports
- Reserve the right to review and approve the work product
- Evaluate job performance
- Require prior permission for absences
- Have the right to hire and fire
How an individual is compensated is another indicator of worker status. Employees typically are paid a salary, an hourly rate of pay, or a draw against future commissions with no requirement for repayment of unearned commissions. Employees may also receive certain fringe benefits, including an allowance or reimbursement for business or travel expenses.
The nature of the services performed is also key to deciding if a worker is an employee or an independent contractor.
Unskilled or casual workers are usually employees because their labor is often supervised. However, even professionals such as doctors and lawyers, who have much freedom to perform their duties, may be employees if they are subject to significant control.
The courts have also found that workers may be employees and that an employment relationship may exist if the employer controls important aspects of the services performed, other than results and means.
For example, a referral agency usually does not directly supervise the individuals it refers for assignments. It could be their employer, however, if it controls such important aspects of the services as:
- Client contact
- Billing and collection from clients
- The individual's wages
The Independent Contractor Relationship
Independent contractors are free from:
- Direction and
- Control in the performance of their duties.
They are in business for themselves, offering their services to the general public.
Signs of independent contractor status include a person who:
- Has an established business
- Advertises in the electronic and/or print media
- Buys an ad in the Yellow Pages
- Uses business cards, stationery, and billheads
- Carries insurance
- Keeps a place of business and invests in facilities, equipment, and supplies
- Pays their own expenses
- Assumes risk for profit or loss
- Sets their own schedule
- Sets or negotiates their own pay rate
- Offers services to other businesses (competitive or non-competitive)
- Is free to refuse work offers
- May choose to hire help
An employer-employee relationship may exist regardless of how the hiring party describes it. For example, if you give a worker a 1099 Form rather than a W-2 Form, they may still be an employee. Persons who work for you may qualify as employees under the law, even if, for example:
- You have the person sign a statement claiming to be an independent contractor
- They waive any rights as an employee
- You require them to obtain a dba in order to work for you
Under the Unemployment Insurance Law, an agreement by employees to waive their rights under the law is not valid.
Remember that the real distinction between the employer-employee relationship and the independent contractor relationship depends primarily on the level of supervision, direction, and control exercised by the person engaging the services. It is not defined by what the relationship is called by the participants.
Whether the relationship is one of employer-employee will depend on several factors.
Separate Business Entity
The law also contains a twelve-part test for determining when a sole proprietor, partnership, corporation, or other entity will be considered a separate business entity from the contractor for whom it is providing a service. If an entity meets all of the 12 criteria, it will not be considered an employee of the contractor but will instead be a separate business that is itself subject to the new law regarding its own employees.
The statute excludes or covers certain types of services, regardless of the degree of direction and control.
For details on independent contractors, please see our Independent Contractors publication.
If you believe that some of your workers are independent contractors, ask for a formal determination by writing to the address below. Include a copy of any contract and details of your relationship.
If you have any other questions call the Liability and Determination Section at 518-457-2635.
New York State Department of Labor
Unemployment Insurance Division
Liability and Determination Section
P.O. Box 15122
State Office Building Campus
Albany, New York 12212-5122