Who's the Employer?

Answers are provided by S. Derrin Watson

Does an Independent Contractor Agreement Matter?

(Posted March 26, 2001)

Question 89: I run a company, and I've had all the workers sign independent contractor agreements in which we agree (i) they're not my employees, (ii) I won't do withholding, and (iii) I won't provide them with any benefits. Now I want to set up a retirement plan for me, and my administrator says I may have to include them anyway. Why should I? Isn't that the whole purpose of having an independent contractor agreement?
Answer: Abraham Lincoln once asked how many legs a dog would have if you called the tail a leg. He answered, "Four. Calling a tail a leg doesn't make it one." By the same token, calling an employee an independent contractor doesn't make him one.

There are many factors used by courts and government agencies (such as the IRS) to decide if a worker is an employee or an independent contractor as a matter of law. In case after case, ruling after ruling, they've said that you need to look at the entire relationship -- all the factors, not just one or two.

Independent contractor agreements can be useful, particularly in close situations that can go either way. But they aren't binding on the government If it is obvious that your secretary (for example) is under your control while at work, then your secretary is an employee, regardless of what the agreement may say.

Perhaps the most famous recent case on this subject is the Microsoft decision. Microsoft had thousands of workers who had signed agreements stating they were independent contractors. The IRS ruled the workers were employees for payroll tax purposes. But courts ruled they were employees for retirement plan coverage purposes. The workers, who said in the agreements that they weren't eligible for Microsoft's benefit plans, just received a settlement of $96 million.

Your administrator is right to be concerned about these issues. I suggest you have an attorney review your entire situation to help determine who really is an employee and who is an independent contractor.

The issues dealing with employees and independent contractors are discussed at length in Chapter 2 of my book, Who's the Employer?. In addition, I will be doing a webcast on employee/independent contractor issues, as well as leased employee questions, on March 28. For more information, go to www.tagdata.com.

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Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.