When companies need additional workers for a large job or someone with a special skill set, hiring an independent contractor can be an efficient and effective way to accomplish the task. Any time you hire a contractor, however, it is critical to ensure that he or she qualifies to be a contractor and would not be considered an employee.

Pros and cons of contract workers

In the tree care industry, contract workers can offer flexibility in two key ways. First, they provide the option for companies to obtain specialized expertise or equipment. While a smaller tree care company might not need an expert climber or a crane operator year-round, contracting for those services on a few jobs can allow them to complete work they’d otherwise need to turn down. Second, contractors provide companies with the ability to quickly scale their workforce. A small company could maintain a lean workforce of four employees full-time, then add contract workers for bigger jobs, like a large brush-clearing project. In either of those cases, maintaining a smaller, core workforce can save money by reducing costs associated with workers’ compensation insurance, benefits, etc.

While contract workers can save money and increase flexibility, there are also some drawbacks to using them. First on the list is safety; any time you’re bringing someone onto your job with different techniques and training, there is the potential for increased risk. If your crews will be working closely with the contract workers, good communication and planning are essential. Another drawback to using contract workers is reduced reliability and predictability. While you may drill punctuality and quality control into everything your employees do, contractors may have different standards. Careful selection of contractors is key to ensuring the overall experience for the customer matches your expectations.

Defining contract workers

As a basic definition, contract workers – also called independent contractors, contractors or consultants – are individuals or companies hired to perform specific tasks. That definition, however, doesn’t tell the whole story; to know for certain whether a person would qualify requires a look at the facts of how the person or company will actually be providing services. We’ll get into some of those factors later in this article, but one key item to know is that whether a worker is an employee or a contractor is a fact and not a choice. Even if the worker and the hiring party both want the worker to be a contractor, if the circumstances of their work match those of an employee, the worker will be considered an employee.

When determining whether a worker is a contractor or an employee, the two most common tests are the IRS “control” test and the Fair Labor Standards Act (FLSA) “Economic Realities” test.

IRS “control” test

When the IRS looks at the circumstances surrounding a contract worker, it is looking to see if the hiring party is controlling how the worker performs his or her tasks, rather than monitoring only the result of the work. This is known as the “control” test. The control test examines three main areas: Behavioral Control, Financial Control and the Parties’ Relationship.

For Behavioral Control, the IRS examines whether the hiring party is training or micromanaging the worker. Contractors should generally come to the job with the full skill set needed, while employees may need training provided by the hiring party. The IRS also looks at the extent of instructions provided to a worker; a contractor would receive instructions like “remove the two green ash trees along west side of property,” whereas an employee would get more specific instructions such as, “I want a rope here and climber there. Bring a lift around this side of the house and place it here. Lower the sections like this and load them using this grapple.” Finally, they expect that a contract worker will be evaluated primarily on the final result they produce and not on the methods they use to accomplish the task. In summary, for the behavioral-control test, avoid micromanaging your contractors. Hire contractors who already have the skills they need, and evaluate based on the end product of their work.

For Financial Control, the IRS is concerned with following the money. A contractor will have made a significant investment in their own tools and equipment. They will likely bear the cost of materials and expenses themselves, building them into their fee. Most crucially, though, a contractor will have the opportunity to control how profitable the job is. For instance, if a contractor agrees to clear buckthorn from a property for $800, the contractor can choose the tools, equipment and personnel to get the job done as efficiently as possible, thereby maximizing profit. By contrast, an employee will likely use the hiring party’s equipment, will not be paying for materials and will not have the freedom to make more money by being more efficient.

When looking at the Parties’ Relationship, the IRS expects a contractor to work for more than one hiring party. They expect a contractor to use a contract that lays out the scope of work and compensation for the worker. They also expect that companies hiring contractors will have their own employees to provide “key” services that the company couldn’t operate without. When the IRS sees workers who provide those key services, who receive benefits like health insurance, paid time off, etc., and who work only for a single employer, that worker looks like an employee.

One important thing to keep in mind is that no single factor determines whether a worker is an employee or a contractor. Instead, the factors are weighed against each other, with all of the factors aligning with contract work on one side of the scale and all of the employee factors lining up on the other. For instance, a skilled climber may be hired to assist on a job. The climber will bring his or her own skills and many of his or her own tools, will have a written contract laying out the terms of the work and will be hired for a specific task. Those factors will all be on the “contractor” side of the scale. The climber will, however, be working on the hiring party’s schedule. The climber also may be paid on an hourly basis, reducing his or her ability to maximize profit. Those factors will go on the “employee” side of the scale. In this example, the contractor side of the scale has more factors and this worker will likely be considered a contractor, even though there are some employee characteristics present.

FLSA “Economic Realities” test

In addition to the IRS, the U.S. Department of Labor (DOL) also enforces worker-classification laws. The DOL has its own test but looks for many of the same concepts as the IRS. The DOL starts by looking at how much control the hiring party has over how the work is performed, the details of the worker’s schedule (such as exact start/end times, break times, etc.) and whether the worker has the right to hire or fire other workers. The more control the hiring party has over those items, the more the worker looks like an employee.

The DOL also will look for monetary factors, like whether the worker has the ability to control their own profit and loss and whether the worker has made capital investments (equipment, tools, etc.). They also will check for whether the worker has special skills that are being sought, whether the worker works for other parties and whether the worker is performing key services to the hiring party.

As with the IRS test, there is no single factor or element that determines whether a worker is an employee or contractor. Instead, the same concept of balancing as discussed above applies.

Misclassification is common

Unfortunately, misclassifying workers is common in the horticulture industry. Surveys have shown that up to 30% of companies may be treating employees as contractors. The IRS views this as a problem because it reduces tax revenue. The Department of Labor views it as a problem because misclassified workers lose out on benefits such as overtime pay, mandatory breaks, workers’ compensation coverage and paid leave.

Penalties for employers

For those companies that misclassify workers, the penalties can be severe. Some of the penalties the IRS can impose include a $50 fine per unfiled W-2 and a fine of 1.5% of all wages paid to the misclassified worker(s). They also can require payment of 100% of the FICA (Federal Insurance Contributions Act) payroll tax the employer should have paid, plus 40% of the FICA that the employer should have withheld from the employee. These penalties commonly exceed $100,000.

Rather than focusing on penalties, the DOL reviews all hours that the misclassified worker(s) worked, then calculates all of the overtime, break time and paid leave the workers should have received. Those amounts are then due as a lump sum that will eventually be distributed to the worker(s). As with the IRS, these amounts can add up fast and create serious problems for employers.

Steps to avoid liability

The risks of misclassifying workers can be enough to destroy a company. Be sure you evaluate the facts surrounding each worker you intend to treat as a contractor. Some tips to help your company avoid penalties and ensure your workers are properly classified include:

• Hire contractors for specific tasks or specific jobs. For general labor, where tasks may vary greatly, use employees.
• When possible, pay contractors on a per-job or per-unit basis.
• Use a written agreement with contractors that details their scope of work, lays out their pay scheme and clarifies that they are independent contractors and responsible for their own taxes, insurance, etc.
• Avoid micromanaging contract workers. Hire contractors who have the skills and equipment they need, and let them determine the details of how to perform the work.
• When in doubt, err on the side of treating workers as employees.

Summary

Contract workers can be helpful for keeping a company’s operating costs down and adding flexibility. Ensuring that the workers you treat as contractors would be considered contractors by the regulating agencies is key. Contractors should bring their own skills and equipment, should have the opportunity to be more profitable by being more efficient and should have control over the methods they use to complete their assigned task. When in doubt, consult an attorney or err on the side of treating the worker as an employee to avoid the potential penalties associated with misclassification. 

Bryan Zlimen is the managing attorney at the law firm of Zlimen & McGuiness, PLLC, in St. Paul, Minnesota. He focuses his practice on creating solutions for small and medium-sized businesses in the horticulture and landscaping industries. Having worked in the industry prior to his law practice, he uses an inside perspective to advise industry professionals on business law, succession planning, collections and contract matters.

This article was based on his presentation made on the same topic during TCIA’s Virtual Summit ’21, which took place in January of this year. Click below to listen to an audio recording of that presentation.