Contractors are cheaper than employees. You don’t have pay the benefits, holiday time or other costs associated with an employee. Plus it’s much easier to terminate a contractor, who generally has fewer options to pursue legal action to argue wrongful dismissal.

So, if two people are doing the same job, what makes one a contractor and the other an employee? It used to be whatever the employer decided to call them. This discretion to arbitrarily classify a worker as a contractor or employee has, however, been limited by a series of legal cases and rulings that began in 1996 and are still being clarified as of October 2014.

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Vizcaino vs. Microsoft

In this landmark settlement, contract workers successfully argued they were essentially employees—they had designated offices, went to company functions, were listed in organizational charts—and therefore eligible for stock options (this was the 1990s when fortunes were made on Microsoft stock) despite the fact that they signed agreements that specifically stated they were not entitled to employee benefits.

Even though Microsoft subsequently hired these workers through third-party contract agencies—a now-common practice to legally distinguish employees from contractors—the courts ruled that these workers were “common law employees” and therefore entitled to the same benefits as regular employees.

One result of this decision was to limit contract duration to a year or two at the most. Legally, indefinite or otherwise open-ended agreements give the appearance of an at will employee-employer relationship.

The Relationship Between Employer and Contractor

A lawsuit filed in November 2014 may potentially threaten an employer’s ability to define exactly how contractors can perform their jobs. Two former workers at California-based Handy, a house cleaning and repair service start-up, contend that strict and explicitly stated requirements on workplace behavior—not just how perform job tasks, but also mandated break times and uniforms as well as whether contractors can listen to music—demonstrates they were de facto employees and therefore entitled to lost compensation. Handy has dismissed the suit as without merit and it remains to be seen what credence the courts may grant it. However, it does underline the need for employers to be very clear and careful in how it distinguishes contractors from employees.

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NLRB 2014 Ruling Against FedEx

A recent NLRB ruling found that FedEx drivers classified as independent contractors should have been classified as employees, and entitled to collective bargaining. This particular case dates back to 2006 and is the latest in a series of differing interpretations; FedEx may appeal and a final determination may ultimately lie with the Supreme Court. However, as the Jones Day Labor Blog emphasizes, now is the time for employers to think about whether their contractors are properly classified.

Factors that Determine Employee or Contractor Status

While interpretations may change, the traditional criteria for determining employee/contractor status encompass:

1. The degree to which the employer controls how work is performed and the hours required to perform work.

2. Whether:

  • Work is performed under the direct supervision of the employer or independently without supervision
  • The worker is engaged in a distinct occupation or business
  • The individual supplies tools to perform the work or the employer supplies the tools
  • Work is part of the employer’s regular business.

3. Entrepreneurial opportunity: does the employer place constraints that prohibit the worker from pursuing other opportunities.

4. Are individuals working as part of their own incorporated business?

Note that this is not a simple checklist and rulings to date have been based on the “totality” of circumstances. These criteria are thus open to interpretation. But, even as interpretations evolve, employers should be aware of what they are based on and plan accordingly.