Perhaps the most difficult part of advising clients on independent contractor law compliance is advising them on what, as a practical matter (i.e. as enforcement agencies see it), amounts to direction/control over independent contractors. Directing/controlling contractors, as you may know, is one of the primary prohibitions when dealing with independent contractors.
On the one hand, there is a logical and intuitive understanding of direction/control. This is the plain and legally defensible meaning of direction/control where business owners understand that contractors should have the freedom to run their business as they see fit; work their own schedule; accept or reject work as they please; and provide the contracted services without being micromanaged. Business owners understand this well, and most are often certain that they do not direct/control contractors in this regard.
On the other hand, however, there is direction/control as interpreted and applied by agencies charged with ensuring compliance with independent contractor law. Here, agencies take the common and legally defensible understanding of what it means to direct and control, and layer on top of it other obscure agency-developed indicators of direction/control, thus resulting in a compliance minefield that is often difficult to safely navigate. Below, I’ve discussed some of the less obvious ways agencies have been finding that a contractor is being directed and controlled. And in a companion blog post, I’ve provided examples of actual consequences to business owners as a result of this approach.
- Flow of Money/Financial Control. Here, an agency will find that an independent contractor is being directed and controlled when an independent contractor is not involved in the negotiation, billing, and collection of fee for services. This typically happens in cases where a business brings in work, and refers it out to independent contractors, who then provide the services for a percentage of the fees charged. Where the money flows from the client through to the business to the contractor, and not directly to the contractor, the flow of money in this scenario is repeatedly being used as evidence of control over contractors.
- Contractual Control. In a sane regulatory climate, it is a prudent practice for a business that engages an independent contractor to have the relationship governed by a formal independent contractor agreement that sets forth terms of the contract, including contract deliverables and basic performance expectations. In the climate we live in, however, having a contract that sets forth even basic performance expectations is almost a guarantee that an auditor will find “evidence” of direction on control. It is too often the case that the very document prepared to help establish independent contractor status is actually the document that an auditor will use to doom IC status. Indeed, I’ve had situations where an agency failed to find direction or control of independent contractors as a practical matter, but then used terms in the IC agreement to say almost gleefully, “Gotcha!”
- Presumption of Direction/Control. There are certain business models that, as agencies see it, raise the presumption of direction/control. These include business models that provide the platform for independent contractors to provide services, business models that send contractors out as their agents/representatives; business models that rely on contractors to provide the work; businesses that make representations about the quality of services contractors will provide; etc.
If this direction/control approach seems rigged against business owners, it’s because it is (whether purposeful or not). If it seems that with all these unwritten/surprising ways in which direction/control can be found, that business owners are at significant disadvantage in trying to comply, it’s because they absolutely are. If it seems that it’s impossible for businesses to satisfy the direction/control test if an agency chooses to find that they fail, it damn near is. Apologies for the cussin. The reality then is that we’re dealing with a legal framework that has no consistency or transparency, and that leaves taxpayers at the mercy of enforcement agencies. Taxpayers deserve better. Much better.
In Oregon, the Court of Appeals recently rebuked an agency’s attempt to find direction/control in every interaction between a business and the contractor, as is the case in Washington. The decision affirmed the notion that not every instance of oversight and coordination of efforts amounts to direction/control since, as the Court wrote, “a person [including an independent contractor] who is compensated for performing services virtually always will be subject to some level of oversight by the entity or individual for whom the work is performed.” It’s a logical, common sense principle that, in time (sooner rather than later), our courts will affirm.
