INDEPENDENT CONTRACTOR OR EMPLOYEE?
Are you an independent contractor or an employee? How do you find out and why does it matter anyway?
"Independent contractor" and "employee" are not just insignificant names or labels in Maryland. This distinction is legally important and just calling someone by one name or the other,or reporting earnings on a Form 1099 instead of a Form W-2, does not make them what they are called. The specifics of the work must be looked at. A multi-pronged test is used under both Maryland and federal law to determine whether you are an independent contractor or an employee. These terms are explained in a complex web of Maryland and federal case law, statutes, and regulations. This article does not answer specific questions, but gives a general guideline of the factors applied in determining whether you are legally deemed to be an independent contractor or an employee. Some of these factors are: control, hours, work location, pay schedules, expense reimbursement, tools and materials, training, continuing relationship, reporting, benefits, supervision, level of flexibility, and hiring and firing.
In general, an independent contractor is likely to have more control over his or her work and more flexibility to work when and where he or she likes, with less supervision and accountability on the daily steps of the work involved. Often, an independent contractor can schedule their own hours, may work offsite, and may not have a typical boss or supervisor. An independent contractor is responsible for getting the specified work done in the manner that they choose. This, however, does not mean that they lack accountability. An independent contractor still has a specified job to do and a deadline by which to have it done. Independent contractors may be paid hourly or per project. They typically do not receive benefits such as health insurance, disability insurance, unemployment insurance, sick leave, or vacation pay.
In contrast, an employee, in general, has much less control and flexibility. Typically,an employee has a boss or supervisor, specified hours, and parameters set by an employer on how and when work should be done, to the employer's standards. While many employees work in an office, some tele-commute or work remotely, but are still under the control of the employer. Employees may be entitled to receive benefits including health insurance, life insurance, disability insurance, unemployment insurance, pension or profit sharing, and sick and vacation leave.
So why does it matter whether you are an employee or independent contractor? First, employees are protected by a variety of wage and anti-discrimination laws that do not necessarily apply to independent contractors. Another ramification of the classification as an independent contractor or employee is that an employer is required to withhold certain federal and state taxes, such as Social Security or "FICA" taxes, worker's compensation and unemployment taxes, and other payroll taxes, from an employee's paycheck. An independent contractor, however, does not have these taxes withheld and instead must file and pay quarterly tax returns and pay estimated tax with Maryland and the Internal Revenue Service. If an employer improperly classifies a worker as an independent contractor when the person is actually an employee, the employer can be liable for back withholding taxes and even fines and penalties.
An overall summary of these issues can be found on the Maryland Department of Labor, Licensing and Regulation website at:
and at the Maryland Workers' Compensation Commission website at:
For federal tax status, the IRS has published helpful information on the factors taken into consideration by the federal government in evaluating whether one is deemed to be an independent contractor or employee:
The Uber Case
In addition to many of the challenges faced by Uber worldwide, a recent hot issue has arisen in the US as to whether Uber drivers are employees or independent contractors. State courts have come to different conclusions. Maryland has not considered this issue in the Uber context, but it stands to reason that this issue is one with nationwide appeal.
Recently, a California Labor Commissioner decided that Uber's classification of its taxi drivers as independent contractors is wrong. In 2014 an Uber driver in California named Barbara Ann Berwick filed a wage complaint in California, seeking reimbursement for business expenses -- gas and bridge tolls. Some other states considering this same issue found that people working for Uber were, in fact, independent contractors. In the California case, Uber refused to reimburse these expenses arguing that Berwick was an independent contractor, not an employee entitled to such reimbursement.
The California Labor Commissioner awarded Berwick these expenses, finding that Ms. Berwick was an employee under a detailed "economic realities" test under California law. The Commissioner noted that Uber provided iPhones to its drivers, monitored and required certain ratings for all drivers, and had sole discretion to set and negotiate the prices customers would pay. The Commissioner also found that Berwick's job did not require a special skill. In addition, in weighing these factors, the Commissioner found that Uber had a large degree of control over its drivers, thus making them employees, with the full protections to which employees are entitled.
While Maryland is not bound by a California decision, it can be persuasive. The Uber issue is a prime example of the varied factors and interpretations used in determining whether one is an independent contractor or employee.
What Should a Maryland Employer or Employee Do?
When accepting a position or hiring, it is critical to keep in mind that whether you call someone an independent contractor or an employee has significant ramifications. Simply calling a person an independent contractor will not legally make it so. Misclassifications can cause independent contractors to miss out on key employment benefits and protections and can result in penalties for an employer, including payment of back taxes, fines, and other penalties.
For people working in the construction, home improvement, and landscaping areas, Maryland law provides some protection against misclassification by employers. The Maryland Workplace Fraud Act of 2009, which was amended in 2012, sets requirements for the classification of a person as an independent contractor or an employee. This was enacted because too many people in these jobs were automatically told they were independent contractors, when they might have legally been employees entitled to employment law protections and benefits.
Because the classification of a worker as an independent contractor or employee requires a careful analysis of many factors, it is wise to obtain legal counsel and speak to an accountant when you are unclear on this important issue.
For more discussion, see http://www.paleyrothman.com/wp-content/uploads/2013/11/MBJ_Nov13_final_krasnoff_hammerschmidt.pdf; and http://www.msba.org/uploadedFiles/MSBA/Member_Groups/Sections/Labor_and_Employment_Law/laborwinter11.pdf.