Employees and Independent Contractors in New York

New York State courts have found that multiple factors must be considered when determining whether an employer-employee relationship exists. Generally, these factors are used to determine the degree to which one person (or business) supervises, directs, and controls the other. The more control a person (or business) has over another, the more likely an employer-employee relationship exists. New York State law also distinguishes between employees and independent contractors. At the outset of any employment relationship, the employer must decide to hire someone as one or the other. There are important differences between the two, which will be highlighted below.

Employees

What is an employee in New York? New York Labor Law defines an employee as a “mechanic, workingman, or laborer working for another for hire.”[1] New York is an “employment-at-will” state. In other words, the employer may terminate the employment relationship at any time for any reason, as long as the termination was not the result of unlawful discrimination, retaliation, interference with a protected right (such as statutory medical leave), or another unlawful reason. By the same token, the employee can quit at any time for any reason. An at-will employment status is presumed if there is no other agreement in place, such as an employment agreement or collective bargaining agreement. It is best practice for an employer who wants to maintain the at-will relationship to ensure that any employment-related documents (such as handbooks, offer letters, and contracts) reaffirm the at-will relationship.

Employment contracts are typically reserved for professionals, executives, and employees with special skills. These agreements set out the details of the employment relationship, generally covering things like salary, benefits, the length of the agreement, and how or why the relationship may be terminated. Employment contracts can also place certain legal restrictions on employees after the employment relationship has ended. For example, very typical are confidentiality, non-disclosures, or non-competition restrictions.

Employers may employ employees for a definite term or an indefinite term. Employment contracts for a definite term “lock in” employees for a pre-determined length of time and rate of pay. Generally, employers may only terminate employees under contract for a definite term “for cause.” Conduct constituting “cause,” if not spelled out in the contract, has been defined as “some substantial shortcoming [of the employee that is] detrimental to the employer’s interest that the law and sound public opinion recognize as grounds for dismissal.”[2] A termination outside these bounds may subject the employer to liability. A more thorough explanation of “for cause” terminations will be provided in a future article.

Employees, unlike independent contractors, are paid wages which are subject to normal payroll taxes. There are a host of laws, regulations, and rules which apply specifically to employees, including wage and hour laws, worker safety regulations, and labor laws for unionized employees, among many others. Many of these laws do not pertain to independent contractors.

Independent Contractors

What is an independent contractor? An independent contractor is a person who agrees, most often by contract, “to achieve a certain result” but is not bound by the orders of the employer on exactly how that result is achieved.[3] Businesses can avoid significant tax and other liabilities every year by classifying certain workers as independent contractors rather than employees. However, the improper classification of workers can result in steep penalties. In determining whether an individual is an independent contractor, New York courts look at a seemingly ever-changing list of factors. Such factors include the degree to which the employer controls, directs, or supervises the contractor, the company’s method of paying the contractor, and the independence of the contractor to do business with other companies.[4]

An independent contractor typically:

1. Charges fees for service;
2. Is engaged only for the term required to perform an identified task or service;
3. Retains control over the method and manner of work;
4. Retains economic independence;
5. Is responsible for paying their income, social security, and Medicare taxes; and
6. Is not protected by most federal, state, or local laws intended to protect employees.

These factors allow a business to avoid many of the financial obligations owed to traditional employees.

These benefits, however, come with risks. A business that misclassifies employees as independent contractors may be liable for back pay, employee benefits, disability payments, workers’ compensation, tax and insurance obligations, and civil monetary penalties. Federal and New York State agencies aggressively enforce rules regarding worker misclassification because of its tax implications. Classification lawsuits are costly and can seriously disrupt and even destroy a business. Additionally, as part of the U.S. Department of Labor’s Misclassification Initiative, it has entered into an agreement with the IRS under which the agencies have agreed to work together to reduce worker misclassification.

To avoid problems that can cause massive disruptions to a business, business owners must think carefully about how they classify those who work for them. Precautionary measures such as employee handbooks, employment contracts, policies and procedures manuals, and offer letters must be carefully drafted to minimize liabilities. At KI Legal, we specialize in creating cost-effective legal compliance strategies regardless of the size or type of business. Our strategies are constantly being developed and refined by attorneys who have decades of experience in Labor and Employment Law and are customized specifically to each client’s needs. Our goal is to help protect and preserve our clients’ businesses.