The Accidental Employee

Did You Hire an Employee or an Independent Contractor?

By Douglas P. Bickham, Esq.

Published: February, 2017

Many homeowner associations employ hired help to perform various functions for the association (e.g., management, maintenance, landscaping, bookkeeping, etc.). Associations may also need outside expertise when undertaking special projects or construction work. This help may take the form “contractors” or “consultants” to perform work for the association on a short term or as needed basis. Usually, such outside help is intended by the association to perform work as “independent contractors” rather than actual employees of the association. However, what associations rarely realize is that they must be very careful because they may end up with “employees” (at least in the eyes of the IRS) on their payroll whether they intended such an arrangement or not.

The legal distinction between an employee and independent contractor can sometimes be a fine line that carries significant consequences for the association. Failure to properly classify a worker can result in substantial and unexpected costs. Not only will the association owe state and federal employment taxes for a misclassified worker, but it can also face significant fines imposed by the IRS for wrongfully classifying a worker, whether intentional or not.

Treasury Regulation § 31.3121(d)-1(c)(2) provides the following general guidance on what factors are considered by the IRS in determining whether a person is an employee or independent contractor:

Generally such [employer-employee] relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so. The right to discharge is also an important factor indicating that the person possessing that right is an employer. Other factors characteristic of an employer, but not necessarily present in every case, are the furnishing of tools and the furnishing of a place to work, to the individual who performs the services.

In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result, he is an independent contractor. An individual performing services as an independent contractor is not as to such services an employee under the usual common law rules. Individuals such as physicians, lawyers, dentists, veterinarians, construction contractors, public stenographers, and auctioneers, engaged in the pursuit of an independent trade, business, or profession, in which they offer their services to the public, are independent contractors and not employees.

Subsequent court decisions have come up with the following eight factors to be considered in determining whether an individual is an employee or independent contractor:¹

The control exercised by the principal over the details of the work;
Which party invests in the facilities used by the worker;
The opportunity of the worker for profit or loss;
Whether the principal can discharge the individual;
Whether the work is an integral part of the principal's regular business;
The permanency of the relationship;
The relationship the parties believe they were creating; and
The provision of employee benefits.

All of the above factors are considered and weighed in light of the circumstances in each situation with no single factor being determinative.² But out of the eight factors listed above, courts have held that the crucial factor in determining whether an employer-employee relationship exists is the “right to control.”³ “An employer-employee relationship exists when the principal retains the right to direct the manner in which the work is to be done, controls the methods to be used in doing the work, and controls the details and means by which the desired result is to be accomplished” (italics added).⁴

In summary, whether an employee-employer or independent contractor relationship exists is a factual test based on a totality of factors, none of which are fully dispositive, but the key factor is who exercises the greatest direction and control over the manner, means and methods of how the work is to be done. Homeowner associations should make sure when hiring outside help that any contract for services clearly states an independent contractor relationship is intended between the parties and that only the independent contractor may control the manner, means and methods to be used in performing the work.

Be careful how you treat your independent contractors because you may just end up with an “accidental employee” on the payroll and all of the costs that go with it. Representatives of an association should only determine if the outcome of the work meets the agreed upon results, not meddle in how the independent contractor performs the work. To be safe, associations should always seek legal counsel before entering into any work relationships to make sure that the relationship intended is the one actually created.

See Ramirez v. Comm'r, T.C. Summary Opinion 2013-38, 2013 Tax Ct. Summary LEXIS 38 (May 20, 2013).
Id.
Blodgett v. Comm'r, T.C. Memo 2012-298, 104 T.C.M. (CCH) 500, 2012 Tax Ct. Memo LEXIS 298 (Oct. 24, 2012).
Id.

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