CONTRACTOR OR NOT?

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The landlord occasionally needs to decide whether an individual performing services in connection with his rental units should be treated as an employee or an independent
contractor.  This decision will determine whether the landlord withholds income and other taxes, provides worker’s compensation insurance and otherwise how he will deal with the host of regulatory agencies and taxing authorities in connection with this person. With respect to the typical landlord or property manager, whether or not the worker is an employee will depend on the degree of control which the landlord exercises over the person.  The parties own characterization of the relationship is not controlling.  According to the Internal Revenue Service a determination will be made on a case by case basis using the common law tests, except in the cases of a few occupations controlled by statute and not relevant here.

How much behavioral control does the landlord have over the individual?  If the landlord controls when, where, and how desired results are to be achieved, rather than assigning a mission and permitting the worker to accomplish it as he sees best, this would be an indication that the worker is an employee.  If the landlord provides extensive training and instruction, rather than relying on the worker’s own skills and experience, this would likewise tend to show the person to be an employee.

How much financial control does the landlord have?  Extensive unreimbursed business expenses tend to show independence.  A significant investment by the worker in tools and facilities tends toward independence whereas reliance on tools and facilities provided by the landlord tends to show the opposite.  An individual whose only “contract” is with the landlord is more likely to be deemed an employee than one who offers his services to a number of accounts.  Payment by the hour, week, month or other period tends to show employee status, while payment by the job tends to show independence.  Similarly, if the worker can make or lose money on a job, he is more likely to be a contractor than one who is not likely to lose money because he is being paid by the hour.

What are the contours of the relationship between the parties?  Though not dispositive, a written contract setting out the type of relationship the parties intend is still a consideration, and its absence indicates employee status. If the worker is provided with benefits that are typically associated with employee status, such as sick pay, vacation, retirement, or overtime, then he is likely to be deemed an employee. The permanency of the relationship is important.  A worker whose engagement is limited to one or two jobs, or who works as jobs come up, or is engaged only for a very limited time, is more likely to be deemed an independent contractor. The degree to which the service provided by the worker is a key aspect of the regular business matters. For example, a resident manager provides services vital to the landlord’s operations.

The IRS has issued a booklet informatively titled {Publication 15A} which you may download for your reading pleasure and enjoyment.  

The determination of employee or independent contractor status is a serious matter with serious repercussions.  Taxing authorities, worker’s compensation boards, and regulatory agencies, for example, have an interest in seeing to it that as many people as possible are classified as employees, particularly after the “independent contractor” has failed to pay his taxes, or been injured on the job.  A mistake in characterization can lead to major financial losses due to liability and penalties, and other ramifications such as denial of insurance coverage.

There is no cookbook method for achieving a guaranteed correct determination.  A determination can be made only on the basis of knowledge and experience.  If the landlord were contemplating engaging the services of workers on an independent contractor basis, he would be well advised to have a meeting with his lawyer and obtain a written opinion on the subject.  The lawyer has resources generally not available to the landlord.  For example, the lawyer, if properly selected, will have years of general experience touching on this area, and access to copies of judicial decisions made in similar circumstances and the ability properly to interpret them.  His opinion letter will be an awfully nice thing to have if something goes wrong.

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