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  1. #1
    Join Date
    May 2018
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    5

    Default At What Point Does an Indpendent Contractor Become an Employee

    My question involves business law in the state of: North Carolina.

    Hello everyone,

    I am starting a business with a partner and we have just formed an LLC, and opened up a bank account.

    Our business is an on-site auto repair business. We get calls from people who need an auto mechanic, then we contract a mechanic to go perform the repairs at the person's home, or wherever they are. We take a fee as a percentage for getting the mechanics the job.

    Now, we are starting to contract someone and I'm confused how far our relationship can go as a contractor relationship.

    I know that we cannot:
    • Manage or direct the process of the work that contractor does (we can't tell them how to do it, we can only tell them how the end result should be)
    • Insist that contractor accept jobs during certain times
    • Insist that contractor does not work in relevant field while performing contracting work for us
    • Hire employee to do same work as contractor


    There are some things that I'm not quite sure about though. Here are some other things we've talked about.
    • Contractor wears a uniform with our name on it, but is not required (Uber and Lyft drivers have stickers on their cars?)
    • We occasionally pay for contractors gas
    • We buy a business phone and give to contractor (for contractor to keep in his possession) so that contractor can use the point of sale mobile application
    • We continue to pay monthly phone bill for the phone that contractor is in possession of
    • We occasionally buy tools for contractor
    • We give contractor a bank card with contractor's name on it in order for contractor to purchase parts for for a client's car (Bank suggested this, insisted that it didn't effect a contractor relationship at all)
    • We buy a company van and let contractor drive said van when performing contract work
    • We no longer contract with contractor because contractor was not previously available for work when contractor stated they would be
    • We guarantee a contractor that while contracting with us they will receive a minimum of $xxx per week
    • LLC member (who takes draw from the business) performs same work as contractor


    I guess from what I've read, there's no set point when a relationship is no longer a contractor relationship, and that everything must be considered. That being said, which or how many of these things would we be able to comfortably do without blurring the line between a contractor and an employee, and which of these things should we avoid doing in order to keep out this strictly a contractor relationship?

    Any other knowledge anyone has regarding this would be great as well!

    Thank you,
    - MM.

  2. #2
    Join Date
    Oct 2016
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    2,665

    Default Re: At What Point Would Our Contractor Be an Employee, Are We Pushing a Limit [Nc]

    Quote Quoting MattMutt
    View Post
    • Contractor wears a uniform with our name on it, but is not required (Uber and Lyft drivers have stickers on their cars?)
    • We occasionally pay for contractors gas
    • We buy a business phone and give to contractor so that contractor can use the point of sale mobile application
    • We continue to pay monthly phone bill for the phone that contractor is in possession of
    • We occasionally buy tools for contractor
    • We give contractor a bank card with contractor's name on it in order for contractor to purchase parts for for a client's car (Bank suggested this, insisted that it didn't effect a contractor relationship at all)
    • We buy a company van and let contractor drive said van when performing contract work
    • We no longer contract with contractor because contractor was not previously available for work when contractor stated they would be
    • We guarantee a contractor that while contracting with us they will receive a minimum of $xxx per week
    • LLC member (who takes draw from the business) performs same work as contractor
    The highlighted are what I see as the biggest problems.

    "We no longer contract with contractor because contractor was not previously available for work when contractor stated they would be"

    That one I just don't understand.

  3. #3
    Join Date
    May 2018
    Posts
    5

    Default Re: At What Point Would Our Contractor Be an Employee, Are We Pushing a Limit [Nc]

    Interesting, thanks for the response! If we give a contractor a tool to complete a job, and then the contractor brings back the tool immediately after, does that potentially produce the same problem?

    Based off that I re-clarified in my original post that the contractor would keep the phone that we give him, at least until he or we decided that he will no longer be contracting with us.

    Quote Quoting PayrolGuy
    View Post
    The highlighted are what I see as the biggest problems.

    "We no longer contract with contractor because contractor was not previously available for work when contractor stated they would be"

    That one I just don't understand.
    Yeah sorry that one is kind of confusing. So I know that we cannot require that a contractor work certain hours. But obviously, we're not required to continue contracting with a contractor if we decide not to for any reason. That confuses me, so if we stop contracting with a contractor because he isn't taking jobs during certain hours, where is the line there?

  4. #4
    Join Date
    Oct 2016
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    2,665

    Default Re: At What Point Would Our Contractor Be an Employee, Are We Pushing a Limit [Nc]

    The phone isn't really a problem. The guaranteed income is the biggest problem I see.

    There is an IRS form https://www.irs.gov/pub/irs-pdf/fss8.pdf that you can complete and submit to the IRS and get an answer. Even if you don't submit it simply completing it may clarify some things for you.

  5. #5
    Join Date
    Jun 2006
    Location
    Massachusetts
    Posts
    23,815

    Default Re: At What Point Would Our Contractor Be an Employee, Are We Pushing a Limit [Nc]

    It is very easy to have employees. It is not so easy to have IC's.

    https://www.irs.gov/businesses/small...ed-or-employee

    There is no single element that automatically makes someone an employee, or a contractor. It is the preponderance of evidence based on the 20 point checklist.

    https://www.walthall.com/wp-content/...-Checklist.pdf

  6. #6
    Join Date
    Nov 2013
    Posts
    6,092

    Default Re: At What Point Would Our Contractor Be an Employee, Are We Pushing a Limit [Nc]

    The IRS is but one of the considerations for tax withholding purposes and social security, but the more important considerations are state laws regarding workman's compensation and unemployment payroll payments. This is where the misclassification can really come back to hurt an employer.

    In NC, the Supreme Court set forth an eight-factor test (called the Hayes factors) to guide courts in determining when a person is an independent contractor:

    The person employed (a) is engaged in an independent business, calling, or occupation; (b) is to have the independent use of his special skill, knowledge, or training in the execution of the work; (c) is doing a specified piece of work at a fixed price or for a lump sum or upon a quantitative basis; (d) is not subject to discharge because he adopts one method of doing the work rather than another; (e) is not in the regular employ of the other contracting party; (f) is free to use such assistants as he may think proper; (g) has full control over such assistants; and (h) selects his own time.
    Not all factors are required, and no one factor is controlling over another; the Hayes factors are considered along with all other circumstances to determine whether in fact there exists in the one employed that degree of independence necessary to require his classification as independent contractor rather than employee.

    The case this is quoted from is an appeal from the North Carolina Industrial Commission's finding that the plaintiff was an independent contractor and not an employee for the purposes of a workman's comp claim. But it is the most current case and it explains the differences between an IC and an employee.

    OP, from what you posted as your business model, I would say that the people you intend to hire or subcontract to would be considered employees rather than IC. It would serve you well to consult an attorney before you start signing contracts with mechanics. Just because someone signs a contract to be an IC doesn't insulate you from being liable for injuries, workman's comp insurance, and unemployment payroll payments.

    Where I live in NJ there is a case where a rather large carpet company would sell carpet and the installation of the carpet was preformed by independent contractors. There were scores of them all under contract. But when one of them was injured and a workman's comp claim was denied by the companies insurance company and it went to court, the NJ Supreme court found that all the IC were actually employees. The company had to pay to the state penalties for no WC and no unemployment benefits. It put the company out of business.

  7. #7
    Join Date
    Feb 2008
    Posts
    1,101

    Default Re: At What Point Would Our Contractor Be an Employee, Are We Pushing a Limit [Nc]

    i'd also be concerned about your last point - that one of the LLC owners also performs the same duties as an employee - why not make that person an IC also....along with others that have been posted (providing tools, van, and minimum set $ amount)

    Whenever it is gray, I say you need to lean towards employee over IC. And that is what I would advise if I were your HR consultant. But definitely visit a local employment lawyer to review all the details as that is what truly matters.

  8. #8
    Join Date
    Oct 2016
    Posts
    2,665

    Default Re: At What Point Would Our Contractor Be an Employee, Are We Pushing a Limit [Nc]

    To the OP. What is your goal in this/these worker(s) being ICs instead of employees? You need to think of the goal instead of the process.

  9. #9
    Join Date
    Oct 2006
    Posts
    15,124

    Default Re: At What Point Would Our Contractor Be an Employee, Are We Pushing a Limit [Nc]

    Quote Quoting PayrolGuy
    View Post
    To the OP. What is your goal in this/these worker(s) being ICs instead of employees? You need to think of the goal instead of the process.
    I suspect that the goal is what the goal is for everyone who prefers to have contractors rather than employees: To save money, time and hassle.

    What they do not understand is that its illegal, they won't get or keep the best people, and they have far less control over the work product and its quality going forward. Eventually one of those misclassified employees will get frustrated and turn them into the IRS and they will end up having to change things anyway.

  10. #10
    Join Date
    Oct 2016
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    2,665

    Default Re: At What Point Would Our Contractor Be an Employee, Are We Pushing a Limit [Nc]

    I know that but from time to time there is another reason. And since the OP put so much work in the post it would be nice to know if that is the case with him.

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