Independent Contractor or Employee – How to Tell the Difference

Affordable housing property managers are required to verify the income of applicants and residents in order to determine both eligibility and (for some programs) rent. The most common type of income requiring verification is employment income and the most common verification method for employment income is third party verification from the employer. This verification is most commonly a written verification from the employer or pay stubs.

 

Verification is also required when an applicant is self-employed or an “independent contractor.” In these cases, we tend to rely on financial records provided by the applicant, such as tax returns or financial statements. Compliance professionals and affordable housing property managers must be able to distinguish between an employee and an independent contractor, which is not always easy, since the line between the two is often blurred. This article is intended to provide guidance that may assist affordable housing professionals in determining whether an individual is an employee or an independent contractor.

 

For many years, employers have recognized a number of benefits of using independent contractors instead of employees for some types of jobs. As with most things, however, those benefits carry some risk. Most of that risk arises because of the difficulty in determining independent contractor status. Whether an individual rendering services to a company is an employee or an independent contractor is often unclear. Even if the parties themselves characterize their relationship as an independent contractor arrangement, courts and governmental agencies will look beyond that classification to determine the “real” relationship. Following is a discussion of the three primary aspects of the employer/worker relationship that must be examined in determining how to classify the arrangement. These three elements are (1) behavioral control, (2) financial control, and (3) type of relationship.

 

Behavioral Control – facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of –

 

1. Instructions the business gives the worker. An employee is generally subject to the business instructions about when, where, and how to work. All of the following are examples of types of instructions about how to work:
   1. When and where to do the work;
   2. What tools or equipment to use;
   3. What workers to hire or to assist with the work;
   4. Where to purchase supplies and services;
   5. What work must be performed by a specified individual; and
   6. What order or sequences to follow.

The amount of instructions needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work is done. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker’s performance or, instead, has given up that right.

 

2. Training the business gives the worker. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.

 

Financial Control – Facts that show whether the business has a right to control the business aspects of the workers job include:

1. The extent to which the worker has unreimbursed business expenses. Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services they perform for their business;
2. The extent of the worker’s investment. An independent contractor often has a significant investment in the facilities he or she uses in performing services for someone else. However, a significant investment is not required for independent contractor status;
3. The extent to which the worker makes services available to the relevant market. An independent contractor is generally free to seek out business opportunities. Independent contractors may advertise, maintain a visible business location, and are available to work in the relevant market;
4. How the business pays the worker. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when a commission supplements the wage or salary. An independent contractor is normally paid by a flat fee for the job, or in the case of professionals, by an hourly rate; and
5. The extent to which the worker can realize a profit or loss. An independent contractor can make a profit or loss.

 

Type of Relationship – facts that show the parties type of relationship include the following:

 

1. Written contracts describing the relationship the parties intended to create;
2. Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay;
3. The permanency of the relationship. If a worker is engaged with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship; and
4. The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of the regular business activity, it is more likely that the employer has the right to direct and control those activities. For example, if a management company hires a compliance professional, it is likely that the company will present the work of the compliance professional as its own and would have the right to control and direct that work. This is indicative of an employer-employee relationship.

 

While in most cases, the type of relationship is clear, there are times when management professionals have to determine whether an applicant is an employee or an independent contractor, and verify income accordingly. Understanding the concepts outlined in this article may assist in making that determination.