Burton Morgan Competition Workshop
Purdue University
INDEPENDENT
CONTRACTORS
Michael Dalrymple
One American Square, Box 82001
Indianapolis, Indiana 46282-0200
(317) 236-2100 Phone
(317) 236-2219 Fax
michael.dalrymple@icemiller.com
Independent Contractors
I.
Introduction
Companies frequently engage the services of an "independent contractor." The parties
agree that the individual will perform services for the company in exchange for some amount of
compensation. The company then pays the worker out of ordinary operating funds, without
withholding or paying any taxes, which makes the company and the "independent contractor"
very happy -- until something goes wrong. The individual may injure himself while performing
services for the company, the company may terminate the relationship in a manner that the
individual believes is discriminatory, or the IRS might audit the company's books and question
why it has not received any taxes for the employee. When these or other similar events occur, it
is frequently necessary to question whether the individual is truly and independent contractor or
whether he or she is an employee. If such determinations are addressed at the beginning of the
relationship, the nature of the relationship is less likely to be an issue when something goes
wrong.
II.
Factors to Determine If the Individual Is an Employee or Independent Contractor
In determining whether an individual is an employee or an independent contractor (or
some other label), courts use a version of the "duck" test -- if it quacks like a duck, looks like a
duck, and waddles like a duck, it will be presumed to be a duck. Courts look at whether, as a
matter of economic reality, the individual is economically dependent on the business of the entity
to whom he or she is providing services, or whether the individual in actuality is in business for
himself or herself. The primary factor considered by court turns on who has the right to control
the methods and means of the worker's performance. A worker is generally considered to be an
employee if the entity or person for whom the services are provided has the right of control over
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These materials are intended for information only and should not be considered legal advice.
the methods and means of the worker's performance, even if the control is not regularly
exercised. Conversely, if the worker retains control over the methods and means by which he or
she performs the work, courts generally will consider the worker to be an independent contractor.
Different courts employ various versions of the "independent contractor" test.
For
Indiana employers, the most relevant and frequently used tests are set forth by the Indiana
Supreme Court and the Seventh Circuit.1
A.
Indiana Supreme Court
The Indiana Supreme Court in Moberly v. Day, 757 N.E.2d 1007 (2001), restated its
reliance on a ten-factor analysis as provided in the Restatement (Second) of Agency when
determining if an individual is an independent contractor. The ten factors that the court relied
upon are as follows:
1. The extent of control which, by the agreement, the master may exercise over
the details of the work;
2. Whether or not the one employed is engaged in a distinct occupation or
business;
3. The kind of occupation, with reference to whether, in the locality, the work is
usually done under the direction of the employer or by a specialist without
supervision;
4. The skill required in the particular occupation;
5. Whether the employer or the workman supplies the instrumentalities, tools,
and the place of work for the person doing the work;
6. The length of time for which the person is employed;
7. The method of payment, whether by the time or by the job;
8. Whether or not the work is a part of the regular business of the employer;
1
The IRS has a separate, twenty (20) factor test to determine if an individual is an employee or an independent
contractor. The test can be found in Revenue Ruling 87-41, 1987-1 C.B. 296. In 1996, the IRS stated in its Training
Materials that three broad categories are the "most persuasive evidence" on the issue. IRS Training Materials, No.
3320-102 (Released: 10/96). The factors and categories used by the IRS are generally included within the tests used
by the Indiana Supreme Court and the Seventh Circuit.
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These materials are intended for information only and should not be considered legal advice.
9. Whether or not the parties believe they are creating the relation of master and
servant; and
10. Whether the principal is or is not in business.
Note that there is no mathematical formula to be used in analyzing these factors and no
one factor is dispositive.
B.
Seventh Circuit
The Seventh Circuit, when deciding whether an individual was an employee covered
under the Age Discrimination in Employment Act, applied a five-factor analysis in E.E.O.C. v.
North Knox School Corp., 154 F.3d 744 (7th Cir. 1998).2 The court stated that "[t]he ultimate
question of whether an individual is an employee or an independent contractor is a legal
conclusion which involves an application of the law to the facts." Id. at 747. The five factors
used by the Seventh Circuit are as follows:
1. The extent of the employer's control and supervision over the worker,
including directions on scheduling and performance of work;
2. The kind of occupation and nature of skill required, including whether skills
are obtained in the work place;
3. Responsibility for the costs of operation, such as equipment, supplies, fees,
licenses, workplace, and maintenance operations;
4. Method and form of payment and benefits; and
5. Length of job commitment and/or expectations.
C.
Analysis
As shown by the factors listed above, the classification of workers as either independent
contractors or employees is very fact sensitive. The facts and circumstances of the situation are
controlling, and therefore, each practice and procedure which the employer has adopted (or
adopts in the future) will have direct impact upon this analysis. None of the factors contained in
2
The court noted that these five factors subsume the non-exclusive list of twelve factors listed by the U.S. Supreme
Court in Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992).
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These materials are intended for information only and should not be considered legal advice.
the above tests are conclusive, so employers should examine a wide range of factors when
making decisions and determinations. The following chart is provided as a guide in reaching an
appropriate conclusion. Employers should seek advice from counsel regarding their unique
circumstances.
FACTOR
EMPLOYEE
INDEP'T. CONTRACTOR
Instructions
Employer instructs when,
where, and how he or she is to
work
Trained by the employer or
training paid for by the
employer
Services performed are a part
of the business operations and
the business is dependent on
those services
The service must be
performed by a particular
person
Same set of skills required by
other workers
Relies on employer's assistants
and workers
Works on a continuing or
reoccurring basis
Required to work a certain
number of hours per week
Devotes substantially full time
to the employer
Performs work on employer's
premises, even if work could
be performed else ware
Employer sets order or
sequence of work
Reports regularly on progress
Paid Hourly or on salary
Sets own hours, methods, and
order of work
Training
Integration
Services rendered personally
Skill required
Hiring, supervising, and
paying assistants
Continuing relationship
Set hours of work
Full-time
Doing work on employer’s
premises
Order or sequence set
Oral or written reports
Payment by hour, week, or
month
Payment of business and/or
traveling expenses
Furnishing of tools and
materials
Employer pays expenses
Uses employer's tools and
materials
Responsible for own training
Services are periphery and not
vital to business operation
The Service may be performed
by any qualified person
Special skills other than those
required by other workers
Hires and fires own assistants
and workers
Works on an as-needed or byproject basis
Required to complete a
particular task
Free to work when and for
whom he/she chooses
Performs work at location of
his/her choosing
Retains the right to determine
the order or sequence of work
Notifies when task is complete
Payment made by the job or
on a straight commission
Pays own expenses (unless
provided for by contract)
Provides own tools and
materials
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These materials are intended for information only and should not be considered legal advice.
FACTOR
EMPLOYEE
Significant investment
Relies on employer's
investment in facilities
Realization of profit or loss
Working for more than one
firm at a time
Making services available to
the general public
Right to discharge
Right to terminate
Understanding of the parties
III.
INDEP'T. CONTRACTOR
Invests in facilities for
performing services that are
not typically maintained by
employees such as an office
Experiences increases or
Realizes a profit or suffers a
decreases in hourly rate or
loss as a result of services
salary
provided
Works for one primary
Performs more than de
employer
minimis services for multiple
unrelated persons or firms
Services available to the
Services available to the
employer
general public
Subject to dismissal
Can not be fired, but can
breach the contract
May terminate the relationship Must perform under the
at any time
contract
Employer and/or individual
Employer and/or individual
believes the individual is
believes not employed
employed
Liability Consequences
The classification of workers as either independent contractors or employees is extremely
fact sensitive, may change from time to time, and determined what liability an employer has
relating to its workers. Businesses that are concerned with preserving independent contractor
relationships with their service providers should regularly review those relationships to ensure
that the service providers actually are functioning as independent contractors. Also, businesses
should consider entering into written agreements at the outset of the relationship that underscore
the parties' intent that the relationship be that of an independent contractor rather than employeremployee.
Failure to properly classify and treat a worker as either an employee or an
independent contractor may lead to liability for workers compensation, tort litigation, tax
evasion, benefits, wrongful termination, and various statutory civil rights violations, among
others.
The following chart briefly summarizes some of the legal consequences when an
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These materials are intended for information only and should not be considered legal advice.
individual is an employee or an independent contractor.
This list is not intended to be
exhaustive.
LEGAL RESPONSIBILITY
EMPLOYEE
INDEPENDENT CONTRACTOR
Title VII & other employment
discrimination laws
Statutory rights to organize and bargain
collectively under the National Labor
Relations Act
Workers Compensation limits recovery
for workplace injuries
Family and Medical Leave Act
Yes
No
Yes
No
Yes
No
Yes
No
Fair Labor Standards Act
Yes
No
Tortious claims against the
employer/company for workplace
injuries (of the worker)
Respondeat superior liability for the
tortious acts of the worker
Non-physical torts against
employer/company
Payroll withholdings
No
Yes
Yes
No
Yes
Yes
Yes
No
Indiana Wage Payment/Wage Claims
Act
Yes
No
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These materials are intended for information only and should not be considered legal advice.