Devry University
Employment Law HR593
You Decide Assignment You Decide Assignment

Scenario Summary:

Karen is a human resources consultant at a local utility. Originally, the work requested was project-based. Karen was asked to develop training materials for an upcoming session on diversity. Cynthia, the human resources manager, was very happy with the work that Karen did and asked her to work on some additional projects. Before everyone knew it, Karen had been working at the utility for five years.
Karen has been paid a monthly base salary of $10,000 per month. Karen has received a 1099 for her wages over the past five years, but has not received a W-2. Karen was not offered any benefits, but when she was hired, she did not need them, as she was happily married. However, Karen's husband recently passed away and she asked Cynthia about receiving benefits. Cynthia has denied Karen's request. Karen's title, when she started, was Human Resources Temporary, but her new title evolved into Human Resources Consultant to be more consistent with others in the department who are doing work similar to hers. Karen does have a contract with the utility.
Karen has had other limited clients over the years. She had one client for an approximately 40-hour project two years ago, and she currently has another client that keeps her on a retainer basis.
Since she was denied benefits, Karen has contacted the IRS to ask them to determine her status.

Your role/Assignment:

Your role is to decide if Karen is an independent contractor or an employee and discuss some of the preventative and ethical situations that are occurring in this case.

Questions:

1. Do you feel that Karen is an independent contractor or an employee? What is your rationale for this decision?
According to the IRS “People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax” (http://www.irs.gov/businesses/small/article/0,,id=179115,00.html)
According to this definition by the IRS, Karen is an independent contractor.

2. What factors do you feel help contribute to Karen being an employee?
Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed. (http://www.irs.gov/businesses/small/article/0,,id=179112,00.html)
The only factor that I see as contributing of her being an employee is the length of time she has been with the company, five years is an awful long time to be on a contractual/consulting basis that sounds more like permanent employment (Common-Law employee). Most consulting/contractual agreements are usually for a year or less, yet Karen has worked for this company way passed that and has not been given any indication that the end of her contract is approaching, instead she is still being assigned more projects by Cynthia.

3. What factors favor her being a contractor?
The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.
(http://www.irs.gov/businesses/small/article/0,,id=179115,00.html)
Additionally even though Karen is supervised by Cynthia she still has control over how her work is completed, Cynthia only supervises the quality of her work and assigns projects to her but does not monitor or determine when or how the work will be completed.
Additionally Karen receives none of the benefits or perks permanent employees receive as they were denied to her by Cynthia and were not made available to her even before asking Cynthia.

4. What are some potential legal implications in the case? What should the utility do to rectify any wrongs in this situation?
The company has two choices:
Choice one: If they appreciate Karen’s work (which you would expect after her working there for so long…), they should make Karen an offer of employment and provide her access to company sponsored benefits such as medical, dental, 401K any other benefits they offer to the rest of their permanent full time employees.
Choice two: If the company feels they can make do without Karen, they need to amend her contract if there was ever one, if not they would need to draft one that specifies when the end of her contract will be so she as a consultant knows what to expect and so that they rid themselves of any responsibility towards her after the contract expires.

5. Draft a sample policy for limiting the use of independent contractors that will help avoid issues like this in the future.
Independent Contractors Policy Statement:
Intent: ABC Utility intends to comply with all applicable Federal and State laws relative to the use of independent contractors, and to apply their use as part of sound fiscal management.
Guideline: ABC Utility intends to hire individuals as full-time and part-time employees for its regular work force and to meet its short-term labor needs by hiring temporary employees. However, on occasion, in order to meet objectives, it may be necessary to consult with experts in a particular field and to engage individuals for specific periods and/or specific assignments to provide short-term expertise.
An independent contractor is not intended to be a substitute for a regular or a temporary employee. An ABC Utility employee is not eligible to perform work as an independent contractor during the same year in which he/she works as an ABC Utility employee.
Before an individual can provide services as an independent contractor, the questionnaire process must be completed. This guideline is intended to assist managers in meeting their business needs, and to provide information necessary to be in compliance with the law and avoid putting PCC at risk for incurring any financial penalties associated with non-compliance.
Independent Contractor Standards:
An individual who performs labor or services shall be considered to perform the labor or services as an "independent contractor" if the standards of this section are met.
ABC Utility must certify that the contracted work meets the following standards:
1. The Contractor is free from direction and control over the means and manner of providing the labor or services, subject only to the specifications of the desired results.
2. The Contractor is responsible for obtaining all assumed business registrations or professional occupation licenses required by state law or local ordinances.
3. The Contractor furnishes the tools or equipment necessary for the contracted labor or services.
4. The Contractor has the authority to hire employees to perform the labor or services; or fire said employees if necessary.
5. Payment to the Contractor is made on completion of the performance or is made on the basis of a periodic retainer.

Reference Page

1- http://www.irs.gov/businesses/small/article/0,,id=179115,00.html

2- http://www.pcc.edu/hr/contracts/independent-contract.html