In Wisconsin, Most Workers Are "Employees"

By Scott C. Beightol

The accompanying article describes, from a national perspective,¹ the difficult and high-stakes distinction between an "independent contractor" and an employee. As in many labor and employment issues, Wisconsin law imposes an even more stringent standard that favors the employment relationship and protects workers. The unwary employer should consider the liabilities from a tax, employment, and benefits perspective before assuring itself that a particular worker is an independent contractor and not an employee to whom the employer owes additional legal duties.

Growing Use of Independent Contractors

Strong growth continues in the use of independent contractors (and I include in this definition temporaries, lease, or payroll employees). The National Association of Temporary Staffing Services reports that between 1992 and 1995, temporary help employment grew at an annual rate of 17 percent and since 1995 has grown at a rate of 9 percent. Especially strong growth (about eight-fold since 1991) has occurred in the professional ranks, including accountants, attorneys, paralegals, and sales and marketing personnel. The office-clerical sector is still the largest sector of temporaries (about 40 percent), followed by professional and technical workers (including information services personnel), and industrial workers. While growth in the temporary workforce has grown, the sector represents only about 2 percent of the total nonfarm workforce.

As noted in the article, an employer usually is attracted to an independent contractor to streamline operations, avoid tax and benefits obligations, smooth out seasonal or temporary workflow challenges, or, especially with use of temporaries, "try out" a worker before committing to employment. Each of these are legitimate objectives; however, the unwary employer may find that the independent contractor is really its employee unless certain safeguards are put in place.

Determining Independent Contractor Status in Wisconsin

Wisconsin follows a nine-part test to determine if a worker is an employee entitled to Worker's Compensation Act (WCA) coverage.² The test itself presumes the worker is not an independent contractor, but rather an employee, unless all of the nine conditions are met. The nine conditions include whether the worker maintains a separate business with her own office, equipment, and materials; holds a federal employer identification number; and operates under a contract to perform specific services for specific payments under which the worker controls the means of performing the work. The worker also must be responsible for the payment of the "main expenses" for the work, completion of the work, including facing monetary liability for work failures, and must risk profits and losses as a result of the work.

As each condition is considered, one realizes how rare a genuine independent contractor is. The model of a law firm partner with multiple clients, overhead, and control over the legal services performed obviously meets the test. The worker brought on to perform the marketing functions of a small business, who uses the business's equipment, reports to the president who reviews the worker's work and plans, and who has no other marketing clients obviously fails the test and should be treated as an employee.

Liabilities for Misclassifying Employees

The liabilities add up for the employer who erroneously considers a worker to be an independent contractor when the worker actually is an employee. Such an employer may face back taxes and penalties for failing to deduct for FUTA, FICA, and other obligations. Under the Wisconsin WCA, the employer may owe reimbursements, fines, interest, and penalties.³ Similar costs could be assessed against the employer under the Wisconsin Unemployment Compensation Act.⁴ The employer also might face liability for failing to allow access by the affected worker to its employee benefit plans, and be obligated to make back contributions, interest payments, and future payments.⁵

One of the hidden exposures in this area concerns legal liability for events occurring in the workplace. Some employers mistakenly believe that if they use a temporary agency, then the agency is liable for any employment-related claims that may arise. This is not necessarily true. An employer may be considered a joint employer and be subject to liability for wage issues under the Fair Labor Standards Act (FLSA), leave of absence issues under the Family and Medical Leave Act (FMLA), or working conditions under Title VII of the Civil Rights Act, the National Labor Relations Act (NLRA), or the Occupational Safety and Health Act (OSHA). Generally, joint employer relationships exist when one entity effectively and actively participates in the control of employees' labor relations and working conditions.

In determining whether joint employment exists, courts typically focus on the control demonstrated by the potential employer (for example, the business for whom the worker is performing services). The Equal Employment Opportunity Commission recently concluded that a temporary labor agency's client "typically qualifies as an employer of the temporary worker during the job assignment ... because the client usually exercises significant control over the worker."⁶

Niche Areas for Safe Use of Independent Contractors

While most relationships will be found to be employee and employer, I have found in my practice a few niche areas where an employer may safely use an independent contractor. For instance, some small businesses find that as they grow they need human resource services - assistance in recruiting, interviewing, hiring, benefit administration, performance evaluations, compensation systems, and discipline/discharge procedures. A cottage industry of human resource consultants has sprung up to meet these needs. I also have found accountants, information systems technicians, and marketing/public relations professionals to be good candidates for an independent contractor relationship.

Practice Tips

A written contract between the consultant and company reflecting the independent nature of the relationship is recommended. Of course, the words on the document are only as good as the parties' actual conduct, so ongoing efforts need to be made to ensure the independent nature of the relationship. In addition to the checklist included in the accompanying article, I would recommend a contract provision that indemnifies business clients in the event of a misclassification, and a series of representations by the consultants that they have other business clients, maintain an office, buy their own supplies, and so on.

In a contract between a company and a temporary agency, I would include for the company's benefit a prohibition on the agency from placing within a defined time period a worker who has worked for any competitor of the company. An indemnification provision against the agency for any employment-related claims resulting from the agency's actions or inactions also should be sought. To avoid a finding of joint employment, the contract between the temporary agency and company should specify the agency's control over employment of the worker and working conditions and that the agency provides insurance, compensation, and all other employee benefits to the worker.

Conclusion

There are legitimate and sound reasons for a business to use independent contractors. To pass legal scrutiny the occasions will be admittedly limited; however, with careful drafting of a contract and vigilance of the relationship, both the business's need for a flexible workforce and the worker's desired independence can be achieved.

Endnotes

¹ The IRS's 20-factor test is generally used to determine if an individual is an independent contractor or an employee. See 26 CFR § 31.3401(c)-1(b). The same essential definition is used for 401(k) plans. See 26 CFR § 1.423-2(e)(2), 1.421-7(h).

Note: Congressmen Jerry Kleczka (D-Wis.) and Amo Houghton (R-N.Y.) have sponsored a bill that would simplify the IRS 20-factor test. Their bill would classify a worker as an independent contractor if three conditions are met:

1. The employer does not control the way in which the work is done;
2. The individual is free to pursue other business opportunities; and
3. The individual assumes some entrepreneurial risks.

² Wis. Stat. § 102.07(8)(b). The Unemployment Compensation Act includes a similar definition of employee. See Wis. Stat. § 108.02(12)(b).

³ Wis. Stat. §§ 102.81, .82, .85, and .88.

⁴ Wis. Stat. § 108.22-.24.

⁵ See Vizcaino v. Microsoft, 120 F.3d 1006 (9th Cir. 1997) (en banc), cert. den., 118 S. Ct. 899 (1998), for discussion of remedies assessed against Microsoft.

⁶ EEOC Enforcement Guidance, 12/3/97.

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