Make-a-Bed is a furniture manufacturer and distributor with plants in three U.S. states. To save on money, the company President decided to hire an independent contractor to streamline its manufacturing processes. John Engineer was thus hired to study the company’s systems and processes and was told that he should come up with recommendations on how to do the consolidation within one year. As part of the expectations, he was supposed to report to the president his progress on a monthly basis, should handle all meeting schedules and travel arrangements, was expected to turn in work equivalent to 20 hours per week, and would be paid on a per hour basis upon submission of a monthly invoice. In time, John was already spending most of his time in Make-a-Bed although he continued to bill 20 hours of work a week and did not receive reimbursement for his travel expenses to and from the three Make-a-Bed sites in Maryland, Pennsylvania, and Delaware. After a year, John still has not made any formal recommendations to the company and as a result, was replaced by an outside professional consulting agency.
John filed a claim for unemployment benefits with Make-a-Bed as his last employer. Considering the initial agreements with the President, the company submitted a 1099 form that shows John was not an employee of the company but rather, was hired as an independent contractor. Because the claim was denied, John appealed the case that led to a case hearing. The HR Director presented a handwritten statement from the President together with the terms of agreement with John, which John denied seeing and discussing with the President. Testimonies proved that John worked only during normal business hours and could not possibly extend beyond the 20 hours per week as he needed access to computer systems and manuals regularly and thus, could not possibly work from home. He received his pay check on time despite submitting late invoices because a payroll clerk erroneously set up the system that processed John’s payment regularly. In addition, John was never given any benefits such as vacation leave, health or retirement benefits and was never required to notify HR of time off.
Analysis
Considering the above situation, it would seem that John Engineer is an employee of “when and where to do the work, what tools or equipment to use, what workers to hire or to assist with the work, where to purchase supplies and services, what work must be performed by the specified individual, [or] what order or sequence to follow” (Publication 15-A, n.d., p. 7).
Behavioral Control. According to agreement, John was expected to render 20 hours per week and visit the three company sites in order to make a valid assessment and recommendation for consolidation of processes and systems. As a result, it would require John to access the company’s computer system and review technical manuals regularly. While formal training is not necessary, the fact that he has access to the systems and the technical manuals already serve as informal training for John in terms of understanding the system and processes. In addition, because John is required to do his work in the company premises using the company’s tools and resources, this suggests control over the individual, thus, comprises an employee-employer relationship (Zielmanski, n.d., p. 4). Because the company has direct control on John’s number of hours per week and the tools to be used in order to complete his job that makes him an employee of Make-a-Bed (Becker & Haas, n.d., p. 53).
Financial Control. Based on the situation, John claims he was not reimbursed his expenses during site visits, which could happen for both employee and independent contractor status individuals. In terms of fulfilling his job, John was solely dependent on the company’s resources, tools, and facilities in order to complete his assessment. This includes the use of the company’s computer systems and technical manuals. Because most of the tools he used are company-owned and he could not make a fair and valid assessment of the company’s situation otherwise, then he is an employee of the company. In addition, the President specified that John is required to render 20 hours of work weekly and within a period of one year, thus, exercising control on how the company pays the individual. According to the IRS Publication 15A on common-law rules for employee or independent contractor (Publication 15-A, n.d., p. 7), when a company has direct control on an individual’s unreimbursed business expenses, worker’s investment in terms of tools and facilities, and how the business pays the individual, then the individual is considered a company employee. All the above were satisfied in John’s case (Becker & Haas, n.d., p. 53).
Type of Relationship. While there was no established contract between the company and John, the manner at which both parties conducted the working relationship was similar to that of an official employee-employer relationship, although without the added benefits that individuals are supposed to receive under such circumstances.
What to Do to Avoid Similar Occurrences in the Future
As a Human Resources Director, I would ensure if what we really need is an employee or an independent contractor to complete the job. Some of the things I will take into account are the following:
- Compliance with instructions. If the company will have direct control over where, when, and how the individual will conduct and complete his or her work, then the individual is considered as an employee. This includes identifying for whom a service is rendered and for how long, submission of status reports (may be oral or written), and providing ongoing instructions and training to individuals, among others.
- Continuing relationship. If the company plans to hire an independent contractor, then I will ensure that there is no misconception about a continuing relationship between the company and the individual by indicating in the contract commences and when it ends. Otherwise, this will be deemed as an employee-employer relationship.
- Setting of working hours. This shows application of a degree of control over an individual’s work, thus, would put the individual on employee status. For instance, requiring the individual to work on full-time basis as compared to an independent contractor who can complete the work output depending on his or her preferences as long as project is completed based on agreed duration.
References
Becker, J. C., & Hass, R. G. (n.d.). The status of workers as employees or independent contractors. Retrieved from http://students.law.drake.edu/aglawjournal/docs/agVol01No1-Becker.pdf
Publication 15-A Employer’s Supplemental Tax Guide. (n.d.). Department of Treasury Internal Revenue Service. Retrieved from http://www.irs.gov/pub/irs-pdf/p15a.pdf
Zielmanski, K. N. (n.d.). Employee or independent contractor? Avoiding misclassification. Retrieved from http://www.bfvlaw.com/wp-content/uploads/2012/10/Zielmanski-Independent-Contractors.pdf
