Independent Contractors vs. Employees – What Do You Have?
The lines between independent contractors and employees are sometimes blurred and knowing the difference could mean avoiding penalties for misclassifications. For example, classifying someone as an independent contractor when they really are an employee can result in wage and hour issues if the individual was not paid the minimum wage for services rendered or was not paid overtime when required.
Various tests for independent contractors often differ between federal and state law and, in Wisconsin, there are several different tests that apply depending on what law is under consideration. For instance, the rules for who qualifies as an independent contractor or employee under workers’ compensation laws can differ from what qualifies under unemployment insurance laws and wage and hour laws. Accordingly, an individual may be classified as an independent contractor under one law but not another.
Here, we venture to provide a general overview of some of the tests and factors courts and administrative agencies in Wisconsin consider when making independent contractor assessments. In making these determinations, the intent of the parties (as evidenced, for example, through written “independent contractor” agreements) is very important, but it does not control. Generally, it is the totality of the circumstances that control — that is, how, in real life, services are rendered and whether those services are indicative of an employer/employee relationship or an independent contractor relationship.
Here is a quick listing of some of the tests used in Wisconsin for independent contractors:
State Law (Workers’ Compensation)
Under Wisconsin workers’ compensation laws, workers are employees (and not independent contractors) if they perform work in the course of a trade, business, profession or occupation of an employer. An individual is not, however, an employee but rather an independent contractor if he/she meets all of the following conditions.
- Maintains a separate business with his or her own office, equipment, materials and other facilities;
- Holds or has applied for a federal employer identification number with the federal internal revenue service or has filed business or self-employment income tax returns with the federal internal revenue service based on that work or service in the previous year;
- Operates under contracts to perform specific services or work for specific amounts of money and under which the independent contractor controls the means of performing the services or work;
- Incurs the main expenses related to the service or work that he or she performs under contract;
- Is responsible for the satisfactory completion of work or services that he or she contracts to perform and is liable for a failure to complete the work or service;
- Receives compensation for work or service performed under a contract on a commission or per job or competitive bid basis and not on any other basis;
- May realize a profit or suffer a loss under contracts to perform work or service;
- Has continuing or recurring business liabilities or obligations; and
- The success or failure of the independent contractor’s business depends on the relationship of business receipts to expenditures.
All of these elements must be met in order to classify a worker as an independent contractor under Wisconsin’s worker compensation laws.
State Law (Wisconsin Fair Employment Act)
The Wisconsin Fair Employment Act (the “WFEA”), like Title VII of the Civil Rights Act of 1964, makes it illegal for employers to discriminate against employees on the basis of protected characteristics, such as race, sex, age, etc. Determinations of whether an individual is an employee or independent contractor for purposes of the WFEA calls for fact intensive inquiries based on an “economic realities” test that places heavy emphasis on the employer’s/company’s “right to control” the means and manner of the worker’s performance. Factors considered have included:
- the kind of occupation, with reference to whether the work usually is done under the direction of a supervisor;
- the skill required in the particular occupation (with higher skilled workers and workers who need to exercise initiative in their work more likely to be considered an independent contractor);
- whether the employer furnishes the equipment used and the place of work;
- the length of time during which the individual has worked (with longer, undefined work tending to show employment relationships);
- the method of payment (whether by time or by the job, with work by the job tending to show an independent contractor relationship);
- the manner in which the work relationship is terminated (with relationships that do not have time limits tending to suggest an employment relationship, term-based arrangements tending to show an independent contractor relationship and contracts with consequences for termination tending to suggest an independent contractor relationship);
- whether PTO, sick leave or other leave is afforded (with the availability of fringe benefits tending to show an employment relationship);
- whether the work is an integral part of the business of the employer;
- whether annual leave is afforded;
- whether the employer pays social security taxes for the worker; and
- the intention of the parties (although this alone is not sufficient to create an independent contractor relationship for purposes of the WFEA, even if there is a written contract).
No one factor is determinative, as the analysis rests on the totality of the circumstances with, again, a heavy emphasis on the company’s right to control the work.
State Law (Unemployment Insurance)
Wisconsin’s unemployment insurance law calls for a two-part analysis in assessing whether a person is an independent contractor or an employee. For general private employers, the first part of the test asks whether the services of the individual are performed free from control or direction by the employing unit. If so, the worker must meet at least six of the following nine conditions to be considered an independent contractor:
- The individual advertises or otherwise affirmatively holds himself or herself out as being in business.
- The individual maintains his or her own office or performs most of the services in a facility or location chosen by the individual and uses his or her own equipment or materials in performing the services.
- The individual operates under multiple contracts with one or more employing units to perform specific services.
- The individual incurs the main expenses related to the services that he or she performs under contract.
- The individual is obligated to redo unsatisfactory work for no additional compensation or is subject to a monetary penalty for unsatisfactory work.
- The services performed by the individual do not directly relate to the employing unit retaining the services.
- The individual may realize a profit or suffer a loss under contracts to perform such services.
- The individual has recurring business liabilities or obligations.
- The individual is not economically dependent upon a particular employing unit with respect to the services being performed.
State Law (Wage and Hour)
For wage and hour matters, a six-part “economic realities” test is used to determine whether a worker is an independent contractor or not, with the factors to be considered being as follows:
- The degree of control exercised by the employer;
- The worker’s susceptibility to and opportunity for profit and losses;
- The worker’s investment in equipment and staff;
- The degree of specialized skill required for the work;
- The permanency of the relationship (i.e. whether it is open-ended or term based); and
- Whether the work is an integral part of the business of the employer (the work cannot simply be an extension of the company’s business for an independent contractor relationship to exist; it should be different from the company’s core business).
Federal Law (7th Circuit)
The Seventh Circuit looks to the “economic reality of the working relationship” to determine whether an employment relationship exists. Though various factors are considered (i.e. the nature and degree of the company’s control, the worker’s opportunity for profits and exposure to loss, etc.) no criterion is by itself dispositive or controlling. The analysis requires an examination of the totality of the circumstances with the ultimate inquiry turning on whether, as a matter of “economic reality” the worker is depending upon the business to which he/she renders services.
The interplay and analysis between these different laws can be daunting. Should this issue arise in your work, we recommend retaining an employment lawyer familiar with how these issues play out in your state.
This article is a publication of MWH Law Group LLP and is intended to provide general information regarding legal issues and developments to our clients and other friends. It should not be construed as legal advice or a legal opinion on any specific facts or situations. For further information on your own situation, we encourage you to contact the author of the article or any other member of the firm.
© MWH Law Group LLP 2021. All rights reserved.
CONTACT ATTORNEY WARREN B. BULIOX
WARREN B. BULIOX
Equity Partner, Milwaukee
735 N. Water Street, Suite 610, Milwaukee, WI 53202
P: (414) 436-0353 / F: (414) 436-0354
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