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