There is often much confusion on whether an employee is considered an “independent contractor” or an “employee” in the eyes of the law. It is a hot topic given that classification matters because it may materially impact insurance, tax, and liability issues. From a liability perspective, business owners may prefer to classify employees as “independent contractors” because an owner who employs an independent contractor is generally not liable for injuries to third persons caused by the contractor’s negligence and federal and state anti-discrimination laws usually do not apply to independent contractors. Additionally, employers may prefer to label certain employees as independent contractors because of the “hassle factor” – i.e. less paperwork to deal with given that classification impacts tax issues. Employers have to pay their share of employment taxes for employees, withhold employee’s share of employment taxes from gross pay, and report gross and net wages to the government, whereas an independent contractor will be subject to the self-employment tax. In contrast, individuals may want to be classified as an employee because if they are injured on the job, they generally would receive worker’s compensation benefits under a state worker’s compensation act. In order for workers’ compensation statutes to provide coverage, the parties must have an employer-employee relationship at the time of the injury. An independent contractor should also make sure that they have appropriate insurance in place in the event of lawsuits, property damage, and other issues.
If you are assessing whether you have an independent contractor working for you, there are some considerations:
- Review the IRS Guidelines. The IRS guidelines are a good place to start and provide guidance: “You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.” (see http://www.irs.gov/). The IRS guidelines also go on to note that “facts that provide evidence of the degree of control and independence fall into three categories”:
- Behavioral: Does the company control or have the right of control what the worker does and how the worker does his/her job? (Remember that it’s not whether the employer actually exercises the control but whether the employer can exercise the control).
- Financial: Are the business aspects of the job controlled by the payer? (how the worker is paid, are tools/supplies provided, the extent to which the worker has unreimbursed business expenses, etc.)
- Type of Relationship: Are there written contracts (evidencing intent/understanding of the parties’ relationship) or employee type benefits? (i.e. vacation pay, pension plan, insurance)
Be mindful that employers who misclassify workers as independent contractors can end up with substantial tax bills and be subjected to tax penalties for failing to pay employment taxes and/or failing to file the requisite forms. The IRS guidelines are a great starting point and a tax professional and/or a lawyer will be able to assist if you have problems with classification.
- Should You Have An Independent Contractor Contract? It depends. Generally, courts take the position that neither the presence or absence of a written contract controls whether an individual is deemed an independent contractor. Notwithstanding, with respect to application to the horse industry, in some cases an independent contractor contract may be appropriate and may be beneficial if a matter goes on to litigation. One likely would not have a contract for a veterinarian or farrier, but subject to the specific circumstances, may for a trainer, jockey, braider, or exercise rider.
Be mindful that a contract for an independent contractor will differ from that of an employee contract and that such a contract, on its face, should describe an independent contractor relationship. For example, for an independent contractor contract, while not exhaustive, consider having the following clauses:
- Refer to independent contractor as “Contractor” and the horse or farm owner(s) as “Owner” respectively
- Contact term (when work will start, when work will end)
- Contractor responsible for bringing his own tools
- Contractor (not employer) determines when, where, and how to perform work
- Contractor will not be provided worker’s compensation coverage or benefits
- Contractor will be responsible for complying with tax requirements (e.g. 1099)
Of course, individuals likely to be considered an “employee” would have a different contract (e.g. barn managers, assistant barn managers, etc.).
- There is no “magic” analysis.
Whether an individual is an employee or an independent contractor is subject to a multi-factored analysis. Case law concedes that this can be a grey area in the law. When such matters come to litigation, courts often assess a number of different factors and any determination turns on a very fact-specific inquiry and analysis. In legal terms, courts look to the “totality of the facts and circumstances” and there is no hard and fast rule. But, a primary focus is an employer’s right of control of the work to be performed.
With respect to right of control, courts look to a number of factors and there also is no bright-line test. For example, what about the exercise rider who is told to breeze, gallop, or jog the horse, or pre-race instructions given to jockey—is that sufficient indicia of the right of control work done? Exercise riders are often times considered independent contractors. Facts that would support this determination would be the owner only providing general instructions on the type of work (e.g. breeze, gallop, or jog the horse), the owner who does not supervise work closely, and the individual/exercise rider has significant freedom to perform the work as desired (e.g. individual can come and go as they please, work for other people, works for many other people, can decide not to ride the horse if he/she thinks not in best interest of horse, as he/she sees fit).
What about tools? Horses, saddles, bridles, versus helmet, chaps, whips? Provision of tools may weigh in favor of an employee determination—i.e. providing the horses, saddles, bridles, and other equipment necessary to perform the work of exercising and training the horses. However, an individual’s provision of their own helmet, chaps, whip, and vest, may not impact the determination and the individual may still be found to be an employee. (Note: case law explains that provision of a halter for a farrier is not considered “equipment” any more than a corral or other enclosure that a horse is kept in). Some courts have held that a jockey injured while working out a horse was an employee of the owner of the horse and therefore entitled to worker’s compensation benefits based on the fact that horse owner had supplied the jockey with the riding equipment on the day of the accident and due to the fact that the jockey was required to ride all of the owner’s horses that day at the track. In contrast, courts have found that a jockey injured during the course of a race was an independent contractor because the jockey provided all of his own equipment and the jockey was free to ride other owners’ horses in other races that day.
With respect to the financial piece, court may look at how the work is compensated, as well as the nature of the work. For example, indicia of employee status would be evidence that an individual was receiving wages and receiving a W-2 or a 1099 from the employer and whether there are deductions or withholdings from compensation. If the exercise rider/jockey etc. is guaranteed a minimum salary rate not predicated on the number of horses rode, receives a Christmas bonus and shares in a portion of prize money that a horse wins that may be further indicia of an employer/employee relationship.
In contrast, indicia of an independent contractor would be submission of a monthly bill for services performed that the owner must pay. Courts also might assess the degree of economic dependence that an individual has with a farm or owner. For example, is a trainer/rider/barn worker working with one owner (more likely an employee) or relying on multiple owners for income (more likely an independent contractor). Is the jockey working with one owner, riding all of that horse owner’s horses that day in every race (more likely an employee) or just one race and one horse (i.e. a “free-lance” jockey) (more likely an independent contractor). The same analysis can apply to a barn worker.
Determining how to classify a barn worker can be particularly complicated. As a preliminary matter there are different types of barn workers: barn managers, assistant barn managers, stall cleaners, etc. Consider the barn worker who is told what to do (e.g. feed x horses, x times a day, x tasks, etc.) but isn’t micromanaged by the barn owner. At first blush, the individual may appear to be an independent contractor, but in light of the information in this article, the IRS and common law would likely classify these individuals as employees.
The parties’ respective expectations and understandings can also play a role. For example, does the person consider him/herself an employee of X Farm? Do the parties have a written contract which spells out the parties’ intent and/or understanding of the relationship? Consider whether the parties have had oral or written discussions outlining and/or describing the nature of the parties’ working relationship. Communicating on specifics with the individual working for you may be beneficial to iron out details of the working relationship, highlight (and then give time to correct) if there is a disparity in the parties’ respective understanding of the relationship, and hopefully prevent disputes in the future.
While this can be a complicated determination, if you have questions about whether you have an employer-employee relationship or an independent contractor relationship, consult a knowledgeable attorney or tax professional, as appropriate.
This article was previously published on Rate My Horse PRO on Thursday, June 18, 2015.