New criteria used to determine independent contractor status
The potential civil penalties and damages are significant for erroneous employment status
Q. Peter owns a small accounting business and is trying to implement a wellness program for his employees. His daughter has a friend, Lucy, a personal trainer who has offered to teach a lunchtime fitness class for $50 per session. If Peter decides to absorb this cost on behalf of his employees, should Lucy be an independent contractor?
A. There has been and continues to be unprecedented effort by state and federal authorities to discover and stop so-called misclassification of employees as independent contractors. In what has been described as an effort to simplify the rules for determining independent contractor status, the New Hampshire Legislature took action earlier this year.
Effective Aug. 6, 2012, the existing 12-part test used to determine whether an individual is an employee or an independent contractor under wage and hour, whistleblower and workers’ compensation law has been replaced with a new seven-part test.
This revised test essentially maintains six of the original criteria exactly as they were in the prior test, modifies one and eliminates the rest. The new list asks whether:
• The person possesses or has applied for a federal employer identification number or Social Security number, or in the alternative, has agreed in writing to carry out the responsibilities imposed on employers under the state’s wage and hour laws.
• The person has control and discretion over the means and manner of performance of the work in that the result of the work, rather than the means or manner by which the work is performed, is the primary element bargained for by the employer.
• The person has control over the time when the work is performed, meaning the time of performance is not dictated by the employer. However, this shall not prohibit the employer from reaching an agreement with the person as to the completion schedule, range of work hours, and maximum number of work hours to be provided by the person, and in the case of entertainment, the time such entertainment is to be presented.
• The person hires and pays the person’s assistants, if any, and to the extent such assistants are employees, supervises the details of the assistants’ work.
• The person holds himself or herself out to be in business for himself or herself or is registered with the state as a business and the person has continuing or recurring business liabilities or obligations.
• The person is responsible for satisfactory completion of work and may be held contractually responsible for failure to complete the work.
• The person is not required to work exclusively for the employer.
The new statute strikes the requirements that the person: have continuing or recurring business liabilities or obligations; receive compensation for work or services performed and his or her remuneration is not determined unilaterally by the hiring party; supply the principal tools and instrumentalities used in the work, except for unique tools or instruments of the employer; and the person’s success or failure depends on the relationship of the receipts to expenditures of his or her own business.
These legislative changes were made in an effort to make it easier for an individual to qualify as an independent contractor under state employment laws. It remains to be seen if these changes will accomplish that goal.
When deciding whether to accept Lucy’s services as an independent contractor, Peter should review the criteria above and take the following preventive measures:
• Have a written contract with Lucy setting out mutual obligations and expectations.
• Negotiate the price on some basis other than hourly payment for time worked and, even better, have the worker propose the fee allowing for negotiation.
• Require Lucy to carry her own worker’s compensation and liability insurance and have the fitness class participants sign waivers for Lucy (although Peter may also want waivers for his company).
• Determine whether Lucy is in an independent business offering similar services to others.
• Allow Lucy to decide how her classes will be run and make sure she brings her own equipment (although Peter can determine the time and days of week when the classes should occur).
Peter also needs to keep in mind that the new statute does not address whether an individual is an independent contractor for purposes of unemployment insurance or federal tax liability.
New Hampshire Employment Security uses a three-part test to determine independent contractor status for purposes of unemployment, and it is quite difficult to meet. The state law tests are typically seen as more stringent than IRS test, which balances a number of factors. Just because an individual passes the test of one of the agencies that reviews the issue, does not mean the individual will be a contractor for all purposes. Companies should carefully consider all of the risks prior to engaging individuals in contractor roles since the potential civil penalties and damages are significant.
Charla Bizios Stevens, a shareholder and director in the Employment Practice Group of the McLane Law Firm, is state director for the HR State Council of New Hampshire. She can be reached at 603-628-1363 or at email@example.com.