1099 Independent Contractor vs Employee

Jesse Bifulco, Attorney, Camden Maine

August 2018

As the old saying goes, “if it walks like a duck, and quacks like a duck, it’s a duck.” But when do you know if your worker is an independent contractor? Or an employee subject to all the wonderful withholding, insurance and other costs associated in Maine and the federal government for paying someone to work for you? The wrong answer could cost you a $10,000 fine.

The right answer in Maine is, it’s a duck if you can prove it “to the satisfaction of the bureau….”
Many businesses prefer to hire independent contractors because there’s often less overhead and fewer expenses (i.e. taxes). However, classify an employee as an independent contractor and you’re in big trouble. Here’s how to legally differentiate between the two.

Much hinges on control.

If the Employee must follow your direction (Zoe our dog won’t)

Who Controls the Worker?

This question is not always easy to answer. According to the U.S. Internal Revenue Service (IRS), evidence of the degree of control and independence of a worker falls into three distinct categories:

● Behavioral: Does the company control or have the right to control what the worker does and how she performs the job?

● Financial: Are the business aspects of the worker’s job controlled by the payer? These include how the worker is paid, whether expenses are reimbursed, and who provides tools/supplies.

● Type of Relationship: Are there written contracts or employee-type benefits such as a pension plan, insurance, sick pay, and vacation pay? Will the relationship continue indefinitely? Is the work performed a key aspect of the business?

Who controls the worker? Getting the answer wrong could cost you tens of thousands of dollars.

Let’s look at an example involving Aaron, Seth, and Ashly. All three perform work for the Haddock Cove Auto Repair Shop.

● Aaron works at the front desk, earns $10 per hour, works from 9am to 5pm and takes complete direction for all of his duties from his supervisor.

● Seth is a mechanic, earns $15 per hour, takes some direction from his supervisor, but only works on an “on call” basis when needed, using the company’s tools.

● Ashly is a master mechanic, paid depending on the complexity of the job, “generally” works from 9am to 5pm, but decides which autos to work on, uses her own tools, and takes very little direction from her supervisor.

Who is an independent contractor and who is an employee? Based on the information above, the answer is – it depends.

● Aaron. It’s likely that Aaron is an employee as he takes all direction from his supervisor.

● Seth. Seth could be an employee as he uses the company’s tools, but working on an on-call basis and only taking some direction from his supervisor makes his designation as an employee less certain.

● Ashly. Ashly is likely an independent contractor as her rate is not fixed, she uses her own tools, and takes very little direction from her supervisor.

Who will the agency claim is an employee?

Form and run your business the right

Keep in mind that any change in Aaron’s, Seth’s, or Ashly’s duties or relationships with ABC could alter their status. According to the U.S. Department of Labor (DOL), misclassification of employees as independent contractors presents one of the most serious problems facing affected workers, employers, and the entire economy.

If the DOL finds that a worker has been misclassified and denied access to critical benefits and protections to which they are entitled such as the minimum wage, overtime compensation, family and medical leave, and unemployment insurance – it can enforce employers to pay the work as an employee going forward. The DOL can make you pay retroactively, all the accumulated compensation and witholding amounts that they think you should have paid from the beginning.

A great example is an actual lawsuit with Federal Express. FedEx settled a class action suit with over 2,000 of its drivers. The reason? The DOL found that FedEx misclassified employees as independent contractors. The result? FedEx must create a $228 million fund to cover the claims.
A Maine case, involving direction and control, Sinclair Builders v Unemployment Insurance Commission involved a residential builder in Ellsworth. Sinclair Builders tried to claim that it’s “salesman” were independent contractors. Sinclair was a residential builder. Once a customer contracted for a job, Sinclair would send “salesman” to go and sell them windows and doors pertaining to the job. The Court said no. The salesman are employees. Quoting Hasco Manufacturing Company, the court stated “Despite the absence of a written contract between Hasco and its salespeople, we affirmed findings that the salespeople received a commission from the sales that they made of Hasco products, and that Hasco set the terms of all sales and ultimately accepted or rejected all transactions initiated by its salespeople.” Based on those factors, the Court found that the salespersons were not free from Hasco’s direction or control over the performance of their services. Id. at 418. Sinclair Builders, Inc. v. Unemployment Ins. Commission, 2013 ME 76, 73 A.3d 1061 (Me. 2013)

Play it safe. Discuss employee classification issues with our experienced business attorneys who can guide you in determining which classifications are correct for your situation. Control contemplated by the statute is general control and the right to control may be sufficient even though it is not exercised.” Me. Auto Test Equip. Co. v. Me. Unemployment Comp. Comm’n, 679 A.2d 79, 81 (Me. 1996).

Sinclair Builders, Inc. v. Unemployment Ins. Commission, 2013 ME 76, 73 A.3d 1061 (Me. 2013)

What about independent contractor status in the state of Maine?
In Maine, in the past there were different standards for workers’ compensation insurance, wage and coverage under the labor law, and unemployment insurance law. However, the state created a common definition of what is an Employee in Maine vs what is an Independent Contractor for all agencies
This standard is contained in a statute. 26 M.R.S.A. Chapter 13 § 1043, 11, E.
To be found to be an Independent Contractor in Maine the Employer must show that the relationship meets all of these criteria:
1. The following criteria must be met:

The individual has the essential right to control the means and progress of the work except as to final results;
The individual is customarily engaged in an independently established trade, occupation, profession or business;
The individual has the opportunity for profit and loss as a result of the services being performed for the other individual or entity;
The individual hires and pays the individual’s assistants, if any, and, to the extent such assistants are employees, supervises the details of the assistants’ work; and
The individual makes the individual’s services available to some client or customer community even if the individual’s right to do so is voluntarily not exercised or is temporarily restricted; and

2. At least three (3) of the following criteria must be met:

The individual has a substantive investment in the facilities, tools, instruments, materials, and knowledge used by the individual to complete the work;
The individual is not required to work exclusively for the other individual or entity;
The individual is responsible for satisfactory completion of the work and may be held contractually responsible for failure to complete the work;
The parties have a contract that defines the relationship and gives contractual rights in the event the contract is terminated by the other individual or entity prior to completion of the work;
Payment to the individual is based on factors directly related to the work performed and not solely on the amount of time expended by the individual;
The work is outside the usual course of the business for which the service is performed; or
The individual has been determined to be an independent contractor by the federal Internal Revenue Service. *(an SS-8 determination)

What if you get it wrong? Penalties. Up to $10,000 in penalties could be fined against the employer. So be ware!

Want new articles before they get published?
Subscribe to our Midcoast Business Owner Newsletter.

<link type="text/css" rel="stylesheet" href="" media="screen"><!-- [et_pb_line_break_holder] --><script type="text/javascript" src=""></script><!-- [et_pb_line_break_holder] --><script type="text/javascript" src=""></script><!-- [et_pb_line_break_holder] --><script type="text/javascript" src=""></script><!-- [et_pb_line_break_holder] --><script type="text/javascript"><!-- [et_pb_line_break_holder] -->//<!-- <!-- [et_pb_line_break_holder] -->if (typeof(ActionStep_Locale) !== 'undefined') {<!-- [et_pb_line_break_holder] --> ActionStep_Locale.setDateFormats('%m/%d/%Y', '%b %d, %Y', '%A %B %e, %Y');<!-- [et_pb_line_break_holder] --> ActionStep_Locale.setFirstDayOfTheWeek('Monday');<!-- [et_pb_line_break_holder] -->}<!-- [et_pb_line_break_holder] --><!-- [et_pb_line_break_holder] -->if (typeof(jQuery) != 'undefined') {<!-- [et_pb_line_break_holder] --> jQuery(window).ready(function() {<!-- [et_pb_line_break_holder] --> jQuery('.DateControl_CalIcon').attr("src", "");<!-- [et_pb_line_break_holder] --> });<!-- [et_pb_line_break_holder] -->} else {<!-- [et_pb_line_break_holder] --> window.setTimeout(function() {<!-- [et_pb_line_break_holder] --> var calImages = document.getElementsByClassName("DateControl_CalIcon");<!-- [et_pb_line_break_holder] --> for (var i=0;i<calImages.length;i++) {<!-- [et_pb_line_break_holder] --> calImages[i].src = "";<!-- [et_pb_line_break_holder] --> }<!-- [et_pb_line_break_holder] --> }, 500);<!-- [et_pb_line_break_holder] -->}<!-- [et_pb_line_break_holder] -->ActionStep_DatetimeControl.CONFIG.dateFormat = 'MMDDYYYY';<!-- [et_pb_line_break_holder] --><!-- [et_pb_line_break_holder] --><!-- [et_pb_line_break_holder] -->//--><!-- [et_pb_line_break_holder] --></script><!-- [et_pb_line_break_holder] --><style><!-- [et_pb_line_break_holder] -->.AdvancedForm {<!-- [et_pb_line_break_holder] --> margin:0;<!-- [et_pb_line_break_holder] --> padding:0;<!-- [et_pb_line_break_holder] --> font-family:inherit;<!-- [et_pb_line_break_holder] --> line-height:1.4;<!-- [et_pb_line_break_holder] --> font-size:1em;<!-- [et_pb_line_break_holder] --> color:#222;<!-- [et_pb_line_break_holder] -->}<!-- [et_pb_line_break_holder] -->.AdvancedForm .FormField {<!-- [et_pb_line_break_holder] --> margin:0 0 2px 0;<!-- [et_pb_line_break_holder] --> width:100%;<!-- [et_pb_line_break_holder] --> font-size:inherit;<!-- [et_pb_line_break_holder] --> padding:6px;<!-- [et_pb_line_break_holder] --> overflow:hidden;<!-- [et_pb_line_break_holder] --> white-space:nowrap;<!-- [et_pb_line_break_holder] --> vertical-align:top;<!-- [et_pb_line_break_holder] -->}<!-- [et_pb_line_break_holder] -->.AdvancedForm label {<!-- [et_pb_line_break_holder] --> width:18em;<!-- [et_pb_line_break_holder] --> float:left;<!-- [et_pb_line_break_holder] --> font-weight:bold;<!-- [et_pb_line_break_holder] --> margin:0 0 3px 0;<!-- [et_pb_line_break_holder] --> padding-right:10px;<!-- [et_pb_line_break_holder] --> font-size:inherit;<!-- [et_pb_line_break_holder] --> white-space:normal;<!-- [et_pb_line_break_holder] --> text-align:right;<!-- [et_pb_line_break_holder] --> vertical-align:top;<!-- [et_pb_line_break_holder] -->}<!-- [et_pb_line_break_holder] -->.AdvancedForm label.required:after {<!-- [et_pb_line_break_holder] --> content:"*";<!-- [et_pb_line_break_holder] --> color:red;<!-- [et_pb_line_break_holder] --> display:inline-block;<!-- [et_pb_line_break_holder] --> vertical-align:top;<!-- [et_pb_line_break_holder] --> margin-left:3px;<!-- [et_pb_line_break_holder] --> font-size:0.9em;<!-- [et_pb_line_break_holder] -->}<!-- [et_pb_line_break_holder] -->.AdvancedForm p {<!-- [et_pb_line_break_holder] --> margin:2em 0;<!-- [et_pb_line_break_holder] --> font-size:inherit;<!-- [et_pb_line_break_holder] -->}<!-- [et_pb_line_break_holder] -->.AdvancedForm p.hint {<!-- [et_pb_line_break_holder] --> color:#777;<!-- [et_pb_line_break_holder] --> margin:0;<!-- [et_pb_line_break_holder] --> display:inline-block;<!-- [et_pb_line_break_holder] -->}<!-- [et_pb_line_break_holder] -->.AdvancedForm input,<!-- [et_pb_line_break_holder] -->.AdvancedForm textarea {<!-- [et_pb_line_break_holder] --> border:1px #ccc solid;<!-- [et_pb_line_break_holder] --> padding:0.2em;<!-- [et_pb_line_break_holder] --> margin:0;<!-- [et_pb_line_break_holder] --> display:inline;<!-- [et_pb_line_break_holder] --> font:inherit;<!-- [et_pb_line_break_holder] -->}<!-- [et_pb_line_break_holder] -->.AdvancedForm input[type=text],<!-- [et_pb_line_break_holder] -->.AdvancedForm textarea<!-- [et_pb_line_break_holder] -->{<!-- [et_pb_line_break_holder] --> width:18em;<!-- [et_pb_line_break_holder] -->}<!-- [et_pb_line_break_holder] -->.AdvancedForm input.DateControl_DateInputBox {<!-- [et_pb_line_break_holder] --> width:6em;<!-- [et_pb_line_break_holder] -->}<!-- [et_pb_line_break_holder] -->.AdvancedForm input.TimeControl_TimeInputBox {<!-- [et_pb_line_break_holder] --> width:6em;<!-- [et_pb_line_break_holder] -->}<!-- [et_pb_line_break_holder] -->.AdvancedForm .DateControl_MemoInputBox {<!-- [et_pb_line_break_holder] --> width:10em;<!-- [et_pb_line_break_holder] --> border-color:#ccc;<!-- [et_pb_line_break_holder] --> border-style:dotted;<!-- [et_pb_line_break_holder] --> border-width:0 0 1px 0;<!-- [et_pb_line_break_holder] --> color:#555;<!-- [et_pb_line_break_holder] --> font-style:italic;<!-- [et_pb_line_break_holder] -->}<!-- [et_pb_line_break_holder] -->.AdvancedForm .FormField input:focus,<!-- [et_pb_line_break_holder] -->.AdvancedForm .FormField textarea:focus {<!-- [et_pb_line_break_holder] --> border-color:#aaa;<!-- [et_pb_line_break_holder] -->}<!-- [et_pb_line_break_holder] -->.AdvancedForm .FormField select {<!-- [et_pb_line_break_holder] --> padding:0;<!-- [et_pb_line_break_holder] --> margin:0;<!-- [et_pb_line_break_holder] --> display:inline;<!-- [et_pb_line_break_holder] --> min-width:10em;<!-- [et_pb_line_break_holder] --> max-width:18em;<!-- [et_pb_line_break_holder] -->}<!-- [et_pb_line_break_holder] -->.AdvancedForm .Submit {<!-- [et_pb_line_break_holder] --> background:none;<!-- [et_pb_line_break_holder] -->}<!-- [et_pb_line_break_holder] -->.AdvancedForm button.Submit {<!-- [et_pb_line_break_holder] --> font-weight:bold;<!-- [et_pb_line_break_holder] --> cursor:pointer;<!-- [et_pb_line_break_holder] -->}<!-- [et_pb_line_break_holder] --><!-- [et_pb_line_break_holder] --></style><!-- [et_pb_line_break_holder] --><form id="ActionStepWebform24" name="ActionStepWebform24" enctype="application/x-www-form-urlencoded" class="AdvancedForm Webform3" method="post" action=""><!-- [et_pb_line_break_holder] --><!-- [et_pb_line_break_holder] --><input type="hidden" name="organization_key" value="penbaylaw" class="OrganizationKey" id="organization_key"><!-- [et_pb_line_break_holder] --><!-- [et_pb_line_break_holder] --><input type="hidden" name="uid" value="ea21573bd5e155c91e8ca81b68428925df0dbac1" class="Uid" id="uid"><!-- [et_pb_line_break_holder] --><div class="FormField P39EMail"><label for="p39__e_mail" class="required js-label">email</label><!-- [et_pb_line_break_holder] --><!-- [et_pb_line_break_holder] --><input type="text" name="p39__e_mail" id="p39__e_mail" value="" class="P39EMail" required="required"><!-- [et_pb_line_break_holder] --><p class="hint">Subscribe Now!</p></div><!-- [et_pb_line_break_holder] --><div class="FormField Submit"><!-- [et_pb_line_break_holder] --><input type="submit" name="Submit" id="Submit" value="Submit" class="Submit"></div></form>