Independent Contractors in Construction Series - Part 1

What is an independent contractor?

Independent Contractors in Construction

Independent contractor relationships are widely utilized in the construction industry, but do you know what they are and the law surrounding their work? This article is a short guide to understanding the risk and rewards of independent contractor relationships.

What is an Independent Contractor?

 An independent contractor is a worker who contracts with individuals or businesses to provide services in exchange for compensation. An independent contractor does not work regularly for any single company and is not an employee. An independent contractor is a separate business, and in all cases should be treated as a separate business. Independent contractors typically:

• Charge fees for service.

• Are engaged only for the term required to perform an identified service or task.

• Retain control over the method and manner of work.

• Retain economic independence.

• Are responsible for paying their income, social security, and Medicare taxes.

• Are not protected by most federal, state, or local laws intended to protect employees.

A business contracting with an independent contractor generally has the right to control only the result of the project and not how the independent contractor accomplishes it.

Companies that engage independent contractors issue them Form 1099-MISC for taxes if they satisfy an annual payment amount. Under federal law, the contracting company has no obligation to provide benefits to the independent contractor or withhold or pay taxes on the contractor's behalf.

In addition, independent contractors are generally free to offer their services to the public and to perform work for other clients. Independent contractors often own their own businesses and provide services according to their own terms.

It is crucial to remember an independent contractor is a separate business and not an employee. An employee, by comparison, is subject to significant oversight by a company. The employer has the right to control the method and manner of the employee's work. In addition, an employee:

• Is paid wages and is eligible for company-sponsored benefits.

• Is employed for a continuous period and performs whatever tasks the company requires.

• Pays the full amount of their income taxes and a portion of their social security and Medicare taxes, generally through their employer with their wages.

• Is economically dependent on the employer.

• Is protected by applicable federal, state, and local employment laws.

Companies cannot rely on generalizations to determine employee or independent contractor status. Classification depends on the facts of each case, application of the appropriate independent contractor tests.

Risks of mis-characterizing an employee as independent contractor include assessment of additional unemployment and worker’s compensation insurance premiums for non-reported employees, additional tax assessments, interest, and penalties on FICA taxes (Social Security and Medicare) that were not withheld from the employee.   

Rewards of utilizing true independent contractors include being able to pass appropriate risk for work to the independent contractor via a contract, which might, for example, require the independent contractor to defend and indemnify your company from any harm caused by the subcontractor, and to name your company as an additional insured on the independent contractor’s general liability insurance.  Risks include the reduced right or ability to direct the means and methods of work, or the particulars of how the work is performed.

The decision whether to hire employees or rely on independent contractors depends on many factors. If you hire an independent contractor, that relationship should be documented in a contract that identifies the parties’ obligations and any limitations on the obligations. If you are considering this decision, or you already have independent contractors working for you, contact an attorney at Galvanize Law Group, LLC., for a more in-depth explanation of the benefits/risks associated with each to understand which is right for your business and assistance in the preparation of an independent contractor agreement.