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In LLCs vs. S-Corps: Selecting a Corporate Form for Your Business we discussed how incorporation of your business can protect you from personal liability for business debts. This week we will discuss another liability shield: the characterization of your workers as independent contractors rather than employees.
In this article, we will explain the differences between employees and independent contractors in Illinois. In LLCs vs. S-Corps: Selecting a Corporate Form for Your Business we discussed how incorporation of your business can protect you from personal liability for business debts. This week we will discuss another liability shield: the characterization of your workers as independent contractors rather than employees.
As an employer, you are liable for your employees’ acts that are committed while acting within the scope of their employment. However, you are not liable for the negligent or intentional acts of independent contractors that you have hired.
Let’s say that Lexcorp, Inc. hires General Zod to drive a shipment of kryptonite from Gotham to Metropolis on Superman’s birthday. En route General Zod hits the bicycling Jimmy Olsen with his truck.
If Zod is an employee of Lexcorp, Jimmy can now sue Zod and Lexcorp, Inc. for his damages, because Zod was acting within the scope of his employment when the accident occurred. (Remember from last week’s article that because Lex Luthor was smart enough to properly incorporate his business, Lex himself is not personally liable for Zod’s actions.)
When Jimmy brings suit against Zod and Lexcorp, Lexcorp’s attorney will argue that Zod is not an employee of Lexcorp, but was instead acting as an independent contractor when he hit Jimmy, and that therefore, Lexcorp is not liable to Jimmy for Zod’s actions.
In order to determine whether Zod was acting as an employee or an independent contractor, the court will look at a series of factors (described below). Since Lex Luthor, president of Lexcorp, consulted with his attorney prior to hiring Zod, he was able to structure Lexcorp’s business relationship with Zod such that the court would find Zod to be an independent contractor. Lexcorp is off the hook and is able to concentrate its financial resources on killing Superman rather than paying damages to Jimmy Olsen.
So what did Lex and his attorney talk about before hiring Zod? First, Lex’s attorney would have told him that there is no rigid rule for determining whether a person is an employee or an independent contractor. Second, simply referring to the person you intend to hire as an independent contractor in your contract will not be determinative—rather it is important to structure the entire business relationship in such a way that the individual is an independent contractor regardless of what the contract says.
Courts consider the following factors when determining whether an individual is an employee or an independent contractor:
- The employer’s right to control the manner in which the work is performed;
- The employer’s right to discharge the employee/contractor;
- The method of payment;
- Whether taxes are deducted from the payment;
- The level of skill required to perform the work; and
- The furnishing of the necessary tools, materials, or equipment
No single factor is determinative, but the right to control the manner in which the work is performed is considered to be predominant.
With these factors in mind, Lexcorp required Zod to supply his own truck and fuel. Lexcorp made a one-time payment to Zod and did not withhold taxes—Lexcorp certainly did not place Zod on salary!
Most importantly, Lexcorp’s agreement with Zod left Zod the freedom to transport the kryptonite from Gotham to Metropolis in any manner that he chose, so long as the kryptonite arrived in Metropolis by Superman’s birthday. Considering the fact that Zod possesses powers of super strength and flight, it is surprising that he chose to transport the kryptonite by truck. However, had Lexcorp specified in its agreement with Zod that Zod must fly the kryptonite to metropolis, Zod would be one step closer to being treated as an employee rather than an independent contractor.
It is important to note that Zod could still be considered an independent contractor even if he performed work for Lexcorp on a regular basis, as opposed to a single job.
With that in mind, next time your business is hiring, you should consult with an attorney to determine whether it might be advantageous to fill the position with an independent contractor rather than an employee. If you seek to hire an independent contractor, it is important to structure your relationship with the contractor in such a way that a court would not treat him or her as an employee. Once you have determined the structure of your business relationship, you should have your attorney draft an Independent Contractor Agreement to memorialize this business structure.
Requiring your independent contractor to sign an Independent Contractor Agreement is important not only to protect your business from liability for the contractor’s negligence and torts, but also to protect your business should a dispute arise between your business and the independent contractor. In Part II, we will discuss the benefits of a properly drafted Independent Contractor Agreement as well as the importance of the different provisions that you should include in such an agreement.
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