Independent Contractor Verification
The distinction between an independent contractor relationship and an employment relationship is an important and sometimes ambiguous one. Independent contractors, as opposed to employees, are not protected by labor standards, workers compensation, or unemployment insurance, and are treated differently than employees for tax purposes by the Internal Revenue Service. Contrary to some common thought, parties may not simply agree that their relationship is an independent contracting relationship rather than employment. The distinction is based, under law, upon objective characteristics of the relationship. The intent of the parties is only one of twenty such characteristics.
The North Dakota Department of Labor is authorized by N.D.C.C. § 34-05-01.4 to verify the independent contractor status of future or existing work relationships in the state. While verification is not mandatory for parties wishing to work as or hire independent contractors, it is available on a voluntary basis to workers and firms who would like to receive a formal verification from the State as to the status of their work relationship.
What Does the Department of Labor Consider in its Review?
In determining the status of workers who apply for Independent Contractor verification, the Department of Labor will apply the "Common Law" test. The test contains twenty factors that have been developed, based on an examination of case law and rulings, considering whether an individual is an employee or an independent contractor. There is no certain number of the twenty points of the Common Law test that must be met in order to qualify as an independent contractor, and the degree of importance of each factor varies depending on the occupation and factual context in which the services are performed. A list of the twenty factors can be found below.
What Happens if the Department of Labor Finds the Worker to be an Independent Contractor?
If the North Dakota Department of Labor finds the worker to be an independent contractor, both the worker and firm are notified of the affirmative verification in writing, and a certificate is issued to the worker. In addition, the North Dakota Department of Labor generally provides the firm with an IRS form (SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) that can be submitted to that federal agency should the firm wish for a determination for tax purposes.
The most significant benefit of an affirmative independent contractor verification is the reduced potential for future liability. If an independent contractor has received verification by the North Dakota Department of Labor, and at a later date is found to be an employee by the Department of Labor, Job Service North Dakota, or Workforce Safety & Insurance, the finding agency may not require the party determined to be the employer to pay taxes, premiums or wages, other than those required by the contract, or any interest, penalty, or delinquency fee with respect to premiums, wages or taxes retroactive to the date the relationship with the employee began. Unless, however, the finding agency determines the employer willfully and intentionally entered into the relationship with the purpose of avoiding unemployment compensation taxes, worker's compensation insurance premiums, or wages. The finding agency may also require the payment of wages, premiums, and taxes for the employee from the date the order declaring an employment relationship becomes final.
What Happens if the Department of Labor Finds the Worker to be an Employee?
If the Department is unable to provide an affirmative verification of independent contractor status, it does not mean that the worker and firm cannot start or continue the relationship unchanged. However, no protection from retroactive liability for premiums, penalties, taxes, wages, etc. is afforded to either party.
What Else Should I Know About the Independent Contractor Verification Process?
An affirmative verification of independent contractor status is applicable only to the specific work relationship between the verified worker and firm, and only to work performed in North Dakota. In addition, if the work relationship between the worker verified to be an independent contractor and the firm for whom he or she works changes significantly, the parties may wish to reapply as the original verification may have become invalidated by the changes.
How do I Apply for an Independent Contractor Verification?
Parties who would like an independent contractor verification of their work relationship may complete the attached Independent Contractor Verification Application (SFN 58394). The form is designed to be completed by the worker and then submitted to the firm for its review, notation of any additional information the firm may wish to include, and signature. Once input and review from both parties is received, as evidenced by the signatures of both parties, the form should be sent to the North Dakota Department of Labor.
Are There Other Uses for the Independent Contractor Verification Application?
In addition to reviewing beginning and existing work relationships as noted above, the department has authority to determine the status of existing or previous work relationships when necessary within the context of investigating a claim for unpaid wages. In these instances, a separate Independent Contractor Verification Application (SFN 58394) is completed by both the wage claimant and the person against whom the claim was filed. The twenty factors considered in evaluating the relationship are the same.
The Twenty Factors of the "Common Law" Test
The following is a list of factors evaluated by the North Dakota Department of Labor when determining the status of work relationships submitted for review under the department's Independent Contractor Verification process.
- Instructions. A person who is required to comply with other persons' instructions about when, where, and how the person is to work is ordinarily an employee. This control factor is present if the person or persons for whom the services are performed have the right to require compliance with instructions.
- Training. Training a person by requiring an experienced employee to work with the person, by corresponding with the person, by requiring the person to attend meetings, or by using other methods, indicates that the person or persons for whom the services are performed want the services performed in a particular method or manner.
- Integration. Integration of the person's services into the business operations generally shows that the person is subject to direction and control. When the success or continuation of a business depends to an appreciable degree upon the performance of certain services, the persons who perform those services must necessarily be subject to a certain amount of control by the owner of the business.
- Services rendered personally. If the services must be rendered personally, presumably the person or persons for whom the services are performed are interested in the methods used to accomplish the work as well as in the results.
- Hiring, supervising, and paying assistants. If the person or persons for whom the services are performed hire, supervise, and pay assistants, that factor generally shows control over the persons on the job. However, if one person hires, supervises, and pays the other assistants pursuant to a contract under which the person agrees to provide materials and labor and under which the person is responsible only for the attainment of a result, this factor indicates an independent contractor status.
- Continuing relationship. A continuing relationship between the person and the person or persons for whom the services are performed indicates that an employer-employee relationship exists. A continuing relationship may exist when work is performed at frequently recurring although irregular intervals.
- Set hours of work. The establishment of set hours of work by the person or persons for whom the services are performed is a factor indicating control.
- Full time required. If the person must devote substantially full time to the business of the person or persons for whom the services are performed, such person or persons have control over the amount of time the person spends working and impliedly restrict the person from doing other gainful work. An independent contractor, on the other hand, is free to work when and for whom he or she chooses.
- Doing work on the premises of the person or persons for whom the services are performed. If the work is performed on the premises of the person or persons for whom the services are performed, that factor suggests control over the person, especially if the work could be done elsewhere. Work done off the premises of the person or persons receiving the services, such as at the office of the worker, indicates some freedom from control. However, this fact by itself does not mean that the person is not an employee. The importance of this factor depends on the nature of the service involved and the extent to which an employer generally would require that employees perform such service on the employer's premises. Control over the place of work is indicated when the person or persons for whom the services are performed have the right to compel the worker to travel a designated route, to canvass a territory within a certain time, or to work at specific places as required.
- Order or sequence set. If a person must perform services in the order or sequence set by the person or persons for whom the services are performed, that factor shows that the person is not free to follow the person's own pattern of work but must follow the established routines and schedules of the person or persons for whom the services are performed. Often, because of the nature of an occupation, the person or persons for whom the services are performed do not set the order of the services or set the order infrequently. It is sufficient to show control, however, if such person or persons retain the right to do so.
- Oral or written reports. A requirement that the person submit regular or written reports to the person or persons for whom the services are performed indicates control. By contract, however, parties can agree that services are to be performed by certain dates and the persons performing those services can be required to report as to the status of the services being performed so that the person for whom the services are being performed can coordinate other contracts that person may have which are required in the successful total completion of a particular project.
- Payment by hour, week, month. Payment by the hour, week, or month generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment made by the job or on a straight commission generally indicates that the worker is an independent contractor.
- Payment of business or traveling expenses, or both. If the person or persons for whom the services are performed ordinarily pay the person's business or traveling expenses, or both, the person is ordinarily an employee. An employer, to be able to control expenses, generally retains the right to regulate and direct the person's business activities.
- Furnishing of tools and materials. The fact that the person or persons for whom the services are performed furnish significant tools, materials, and other equipment, tends to show the existence of an employer-employee relationship.
- Significant investment. If the person invests in facilities that are used by the person in performing services and are not typically maintained by employees (such as the maintenance of an office rented at fair value from an unrelated party), that factor tends to indicate that the person is an independent contractor. On the other hand, lack of investment in facilities indicates dependence on the person or persons for whom the services are performed for such facilities, and, accordingly, the existence of an employer-employee relationship.
- Realization of profit or loss. A person who can realize a profit or suffer a loss as a result of the person's services (in addition to the profit or loss ordinarily realized by employees) is generally an independent contractor, but the person who cannot is an employee. For example, if the person is subject to a real risk of economic loss due to significant investments or a bona fide liability for expenses, such as salary payments to unrelated employees, that factor indicates that the person is an independent contractor. The risk that a person will not receive payment for his or her services, however, is common to both independent contractors and employees and thus does not constitute a sufficient economic risk to support treatment as an independent contractor.
- Working for more than one firm at a time. If a person performs services under multiple contracts for unrelated persons or firms at the same time, that factor generally indicates that the person is an independent contractor. However, a person who performs services for more than one person may be an employee for each of the persons, especially when such persons are part of the same service arrangement.
- Making service available to general public. The fact that a person makes his or her services available to the general public on a regular and consistent basis indicates an independent contractor relationship.
- Right to discharge. The right to discharge a person is a factor indicating that the person is an employee and the person possessing the right is an employer. An employer exercises control through the threat of dismissal, which causes the person to obey the employer's instructions. An independent contractor, on the other hand, cannot be fired so long as the independent contractor produces a result that meets the contract specifications.
- Right to terminate. If the person has the right to end his or her relationship with the person for whom the services are performed at any time he or she wishes without incurring liability, that factor indicates an employer-employee relationship. A contract can be terminated by the mutual agreement of the parties before its completion or by one of the parties to the contract before its completion to prevent a further breach of the contract or to minimize damages. This situation indicates an independent contractor relationship.