Independent Contractor Agreement: Is It Really Effective?

There is an increasing number of companies that are using independent contractors as opposed to W-2 employees.  While many positions including commission sales have relied on independent contractors for years, there is a growing trend in having a company’s labor needs filled by independent contractors rather than employees.  Many times the relationship is defined by a written agreement that defines the relationship as one of an independent contractor.  There are substantial advantages to an independent contractor relationship in terms of reduced cost and potential limits on liability.  However, many times an independent contractor agreement is not dispositive if the relationship is functionally treated as an employee-employer relationship.

Under Kansas employment law, an employment relationship is differentiated from one of an independent contractor relationship by the amount of control exerted by the company over the manner in which the workers carry out their job functions.  In an independent contractor relationship, the company controls only the goals or results of the individual’s work but not the means of accomplishing those results.  Kansas law uses a number of factors to evaluate whether there is enough control exercised over the means of carrying out one’s job functions to constitute an employment relationship including:

• Whether the work is supervised at the job site
• Does the company supply the work equipment and job location
• The payment method hourly employee vs. commission or piece rate
• The actual control exerted by the company over the means of carrying out job duties
• The degree to which the work constitutes a separate occupation or business
• Skill level required for the work
• If the service is continuous or isolated
• Whether the services benefit the employer as an individual or a business
• The degree to which the service provider can make judgments that affect profit or loss to the service provider

Generally, the point is that an employment relationship exists if the services provided are an integral part of the ordinary business of the company, and the service provider is not offering an independent business or professional service to the company.  The ultimate classification is controlled by the actual conduct of the parties irrespective of any classification in a contract between the company and the service provider.

A growing number of companies are taking advantage of the economic benefits of classifying service providers as independent contractors.  There are substantial advantages for companies including shifting the tax burden to the service provider as well as potentially avoiding the expense associated with unemployment or worker’s compensation benefits. If you are completely new to this you might want to seek professional guidance from a lawyer.

By the same token, the cost to a person providing services of being characterized as an independent contractor is extremely high.  The person must pay both income and self-employment taxes.  This effectively means that the service provider is covering the portion of FICA that would be covered by an employer in a traditional employment relationship.  The employee may also bear the risk of job loss or a job-related injury.