Let’s start this topic with a few clichés. One that comes to mind is if it walks like a duck and quacks like a duck, it’s probably a duck. The other that has been popularized in political circles is the phrase “lipstick on a pig”. A pig is still a pig, and no amount of makeup is going to change that reality. Keep these phrases in mind as we discuss the nuanced differences that characterize an employee and independent contractor.

During the recent economic downturn, a number of employers have sought to reduce their payroll (employee benefit) burden by seeking out independent contractors to perform services that were previously performed (and in some cases are concurrently being performed) by employees. This trend may continue as the healthcare law places additional burdens on employers to offer certain health benefits to employees.

Any employer that is looking to replace all or parts of its labor pool with independent contractors must be clear as to the characteristics that differentiate an employee and an independent contractor. The standard test that is applied to determine whether an individual can be rightly characterized as an independent contractor revolve around two primary criteria (i) control and (ii) investment.

Control, which for this article is the first prong of this test, requires that the employer ask the following questions regarding the relationship between the employer and the service provider:

(a) who decides the means and manner in which the services are performed;

(b) who decides the specific times and the methodology used to complete the work; and

(c) who decides whether the service provider will work on other projects while providing services to the employer.

Subject to certain exceptions, if the response to the questions above is that these decisions are controlled by the employer, there is a strong possibility that the individual will be considered to be an employee. One of the primary characteristics of an independent contractor is that once the job is assigned the independent contractor gets to determine the manner and methods by which the service is provided subject to the end product meeting the requirements of the employer.

The second prong of this test involves the level of investment required to perform the services. Generally speaking, the independent contractor is the one that is expected to have invested resources such that the contractor can arrive with the necessary tools, equipment and manpower required to perform the services.

As with all rules, there are exceptions. However, the above criteria should serve as a basis for reviewing a relationship to determine whether there is a strong argument for characterizing the service provider as an independent contractor, or whether the employer is just trying to put lipstick on a pig.

The following link is to a checklist that can serve as a useful reference for an employer to assist with reviewing the relevant factors that go into the determination of whether an independent contractor would be considered an employee: Independent Contractor Determination Checklist.

Any employer considering bringing on independent contractors to perform services normally performed by employees on an ongoing basis should consult with their legal counsel to make sure that they are in fact making an appropriate determination as to the legal status of the service provider.