Blurred lines
Guidance on differentiating between contractors and employees

By Katherine Michalets - Freeman Staff

July 3, 2015

City of Pewaukee-based American Transmission Co. uses contractors for the construction and rebuilding of electric transmission lines all across its service area, which includes the eastern two-thirds of Wisconsin and all of Upper Michigan.
Submitted photo

CITY OF PEWAUKEE - Looking up at the man clearing branches near power lines, the observer may guess that he is a full-time American Transmission Co. employee, but in reality, he is one of many independent contractors the City of Pewaukee company uses. However, much differentiates the independent contractor from an employee in terms of company-provided benefits and tax documentation.

Anne Spaltholz, manager of Corporate Communications for City of Pewaukee-based ATC, said the company uses contractors for the construction and rebuilding of electric transmission lines all across its service area, which includes the eastern two-thirds of Wisconsin and all of Upper Michigan.  Contractors generally work in engineering, environmental, forestry and construction.

During the Recession, companies increasingly turned to contracted workers to compensate for eliminated positions. They also found the lines blurred as full-time employees were given more leeway and took on a role more similar to an independent contractor.

Kim Kozlik, human resources director for MRA-The Management Association, which is a nonprofit trade association with an office in the City of Pewaukee, said the most common mistakes companies make with their handling of independent contractors versus employees tends to be with how they direct the work.

Kozlik gave the example of when an employee does have as much oversight.

“That employee really has their own control of how they need to get the job done. The manager says these are the parameters,” she said. “That’s when those lines are getting blurred.”

 

Legal considerations

Another common mistake is confusing what tax papers the contractor should receive - whether that’s a W-2 or 10-99.

Ann Barry Hanneman, an attorney with Simandl Law Group, S.C. in Waukesha, said companies need to be careful when converting an employee’s role to a contract relationship because it could remain closer to an employee relationship as defined by the law.

City of Pewaukee-based American Transmission Co. uses contractors for the construction and rebuilding of electric transmission lines all across its service area, which includes the eastern two-thirds of Wisconsin and all of Upper Michigan.
Submitted photo

During the economic downturn, Barry Hanneman said, companies were looking for ways to reduce overhead, and if both parties agreed to the employee functioning in a different capacity, the role was changed. It’s important for the company then to analyze the person’s job description to determine if she is an independent contractor by law or an employee of the company.

Good resources for companies when determining a proper classification are the Wisconsin Department of Workforce Development and the Internal Revenue Service.

Barry Hanneman said there are laws at the state and federal levels that define independent contractors. There are also differing definitions of employees versus contractors for laws, such as those addressing workers’ compensation and unemployment tax.

“An employer has to look at these different definitions and look at the factual relationship and whether it meets the criteria in the individual laws,” Barry Hanneman.

It’s important for a company to dot its “Is” and cross its “Ts” when having a worker properly defined because if a person considered a contracted employee files for unemployment, the company may get audited, Barry Hanneman said.

She also said it’s important to be careful about the laws of the state the independent contractor works in if it’s different than the company’s.

“There are a number of layers and that does add complexity. If there is a finding of a misclassification of an employee, there may be penalties,” Barry Hanneman said.

She advises companies do their research and properly classify the worker.

“An agreement alone is not sufficient. They will look at the fact determination to determine the real essence of the relationship,” she said.

The rules governing an independent contractor’s actions can also vary depending on the arrangement made between the entities, especially regarding proprietary information and trade secrets.

At ATC, Spaltholz said the company’s contracts include language that address such issues as access to propriety information, use of company technology, facilities and equipment, and compliance with company policies and industry standards.

Kozlik said companies have only limited ability to control what an independent contractor does regarding dress code and social media practices.

She said the IRS has established three common laws to determine if a person is a contracted worker or an employee.

The first test is behavioral, which involves policies dictating how an employee works and can illustrate if a company is starting to treat a worker more like an employee than a contractor.

Another is financial and how the person’s pay is handled, such as if it’s done through the company’s payroll or if the person is issued a 10-99. How reimbursements for expenses are handled is also a factor.

The third test is about the relationship between the employer and worker and takes into consideration if vacation time, health care and other benefits are provided to the worker.

 

Common law rules

In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered. Facts that provide such evidence fall into three categories:

1.) Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

2.) Financial: Are the business aspects of the worker’s job controlled by the payer? (These include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

3.) Type of relationship: Are there written contracts or employee-type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Source: Internal Revenue Service
 

www.simandlhrlaw.com

www.mranet.org

www.atcllc.com

Email: kmichalets@conleynet.com