This article, written by attorney Karen Whitley, was originally published by seacoastonline.com and can be found here.
Whether a company is a start-up, in growth mode, or looking to hire out-of-state workers, it may face a dilemma about whether to bring on a new worker as an employee or independent contractor. That distinction is important because independent contractors do not receive overtime pay or unemployment benefits, are not covered by the company’s workers compensation insurance, and are fully responsible for paying taxes. They are generally not protected by anti-discrimination and other laws. In most cases, the appropriate choice is to hire the worker as a W-2 employee. But for many reasons, maybe because the worker wants more flexibility or the company only needs short-term help, they each might think that entering an independent contractor relationship is best. Not so fast.
Under New Hampshire law, a worker is considered to be an employee unless (with limited exceptions) they can satisfy the criteria listed in NH RSA 281-A:2 VI(b). That is, in order to be an independent contractor, a worker must:
(A) possess a federal employer identification number (“FEIN”) or social security number, or must agree to carry out the responsibilities of an employer;
(B) have control and discretion over the means and manner of performance of the work, meaning that the result of the work, rather than how and when or where it is done, is key;
(C) have control over the time when the work is performed, although the parties can agree about deadlines for completion, the range of work hours, and the maximum number of work hours;
(D) pay and supervise their own assistants;
(E) hold themselves out to be in business for themselves or be registered with the state as a business, and have continuing business obligations;
(F) be contractually responsible for satisfactory completion of the work;
(G) be allowed to work for others, and not exclusively for the company.
The NH Department of Labor (“NHDOL”) will investigate situations where there is a concern that a worker has been misclassified as an independent contractor. With advance planning and documentation, companies and contractors may increase the likelihood that the NHDOL will agree with the independent contractor designation.
Some of the administrative details are easier to deal with, such as obtaining the FEIN. But unless the parties are thoughtful about the way they structure their agreement and their relationship, it is easy for lines to blur. Common mistakes include not paying attention to the degree to which the worker is integrated into the business and not restricting the amount of control the company exercises over the worker. In other words, the facts could show that the worker isn’t really “independent.” Below are some considerations that could help reinforce the conclusion that, in reality, the worker is actually an independent contractor:
- if the worker sets up a separate entity and follows all corporate formalities, such as establishing a business bank account and paying business insurance and taxes;
- if the worker is responsible for acquiring and paying for all necessary licenses, credentialing, certificates, and training;
- if the worker makes serious and sustained efforts to build their own brand, such as advertising and marketing the business through a professional website, social media presence, and other business development materials;
- if the company and the worker enter a clear independent contractor agreement that, among other things,
- confirms the nature of their relationship and their acknowledgment of each of the independent contractor factors;
- defines the services to be provided;
- ties compensation to projects and deliverables rather than to weekly hours worked; and
- ensures that the parties have considered and comply with the laws in the state where the worker will perform services;
- if the worker diligently stays separate from the company’s business, minimizing involvement in its daily operations, meetings and communications;
- if the company limits oversight over the worker (keeping the focus of the relationship on the end result and interim deliverables, rather than daily accomplishments or hours) and limits supervision by the worker over company employees;
- if the worker actually exercises discretion to decline particular assignments;
- if the worker controls or directs what the scope of work will be, deadlines, pay rates, deliverables, the methodologies and tools used to perform the work, and the location of the work;
- if the worker does not just work for one client on a full-time basis for a long period of time, but instead is actively offering and/or providing services to others;
- if the parties use an invoice system focused on project timelines and deliverables rather than a pattern that resembles a workweek;
- if the parties avoid using words that may conflict with a contractor relationship, such as “staff” or “contracted employee.”
If the NHDOL or a court decides that the worker should have been an employee, the worker could be entitled to unpaid wages, overtime, benefits, and other damages. In order to minimize liability, look critically at the reality of the relationship up front. Be prepared to follow the formalities that show independence. If the parties are confident that they satisfy the independent contractor tests and choose that path, be aware that becoming complacent and allowing lines to blur over time can have costly consequences.