For many businesses, hiring independent contractors seems like a perfect cost-saving solution during a start-up phase or in an uncertain economy. Because independent contractors are considered to be in business for themselves, the IRS and other government agencies do not consider them to be “employees.” Companies do not have to pay payroll taxes for independent contractors, and do not have to provide them employee benefits. In addition, laws intended to protect the rights of employees and which form the basis of employment litigation (wage claims, discrimination and wrongful termination actions) are not available to independent contractors.
However, employers risk significant consequences from this supposed cost-saving solution if they do not understand the complexities of determining who can, and who cannot, be properly classified as an independent contractor. A business that misclassifies an employee as an independent contractor can be liable for taxes; back wages; employee benefits; interest; liquidated damages and civil penalties. Criminal liability is even possible if the employer is found to be acting “willfully” in misclassifying workers.
What makes this area of employment law especially difficult is that governmental agencies and state and federal statutes have different tests for determining how workers must be classified for different purposes. Given the same facts, one agency or statute might classify a worker to be an employee, while another may find the same worker to be an independent contractor. Additionally, all of these tests require a case specific inquiry making it difficult to predict the outcome in marginal or novel cases.
Generally, New Hampshire employers must comply with four separate independent contractor tests: (i) New Hampshire Employment Security’s (“NHES”) “ABC” test; (ii) New Hampshire Department of Labor’s (“NHDOL”) 7-part test; (iii) United States Department of Labor’s (“USDOL”) economic realities/core factors test; and (iv) the Internal Revenue Service (“IRS”) 3-part test.
Overview of Four Tests
NHES, which is charged with overseeing unemployment compensation laws, follows the so-called “ABC” test, which presumes that all workers are employees unless the employer establishes that all three requirements are met:
- Such individual has been and will continue to be free from control or direction over the performance of such services, both under his contract of service and in fact; and
- Such service is either outside the usual course of the business for which such service is performed or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
- Such individual is customarily engaged in an independently established trade, occupation, profession, or business.
See N.H. RSA 282-A:9, III. Businesses usually find the ABC test the hardest to satisfy, especially part “B” of the test. The New Hampshire Supreme Court ruled in In re Appeal of Niadini, Inc., that “[i]f … an enterprise undertakes an activity, not as an isolated instance but as a regular or continuous practice, the activity will constitute part of the enterprise’s usual course of business irrespective of its substantiality in relation to the other activities engaged in by the enterprise.” NHES provides a questionnaire on its website to help businesses assess whether they are properly classifying workers.
When NHDOL assesses whether a worker qualifies as an “independent contractor” for purposes of the state’s employment laws, it applies a seven-part test, all of which are required for a worker to be qualified as an independent contractor. See N.H. R.S.A. 275:4. These seven factors range from a review of the independence of the worker to whether the worker must provide exclusive services for the business.
Another test for assessing “independent contractor” status is the USDOL’s test, which is currently in a state of flux. The Trump Administration imposed a new “core factors” test. Under the test, if the two core factors of “the nature and degree of control over the work” and “the individual’s opportunity for profit or loss” lean in the same direction then that is how the worker should be classified. If the two core factors do not align, then three “other factors” should be reviewed to make the determination, including the amount of skill required for the work, whether the work is part of an integrated unit of production, and the permanence of the working relationship between the parties.
The “core factors” test was to take effect in March 2021, but the Biden Administration withdrew it and reinstated the “economic realities” test. This fact-intensive test assesses seven factors ranging from the extent to which the services rendered by the contractor are an integral part of the company’s business to the degree to which the contractor is independently established as a separate business. More recently, however, a federal court reinstated the “core factors” test. This issue will no doubt be resolved through litigation.
Regardless of which test is ultimately adopted, both the USDOL and the White House have announced plans to prioritize this issue of the misclassification of employees as independent contractors through a range of enforcement strategies, thus employers should proceed with caution when classifying any worker as a contractor.
The final test is overseen by the IRS. The IRS will consider all information that provides evidence of the degree of control and the degree of independence between the parties. Facts that provide evidence of the degree of control and independence fall into three categories for purposes of the IRS test: behavioral control, financial control, and the nature of the relationship between the parties.
Implications for Business
Businesses must realize that in deciding whether an individual is an employee or an independent contractor, the individual’s title is largely irrelevant. Further, the existence of an independent contractor agreement, by itself, does not determine a worker’s status. There are multiple factors, as referenced above, which dictate whether a worker can qualify as an “independent contractor.” Businesses should be encouraged to audit their existing employment classifications to guard against the possible risk of costly litigation and damages for a misclassification of the “independent contractor” relationship.