Ask a Specialist: Independent contractor vs. employee

Question: I have heard that if an employer requires and publishes a weekly work schedule — even though he calls the person who does the work an independent contractor — has made the worker complete an application for employment, requires the worker to take a drug test, and provides a company car and work space, the employer may be required to pay minimum wage for the worker's services. Is this true?

Answer: The answer is twofold. The core of the question is whether a worker is an independent contractor or an employee. It does not matter what the worker calls himself or what the worker is called by the business that uses the worker's services; the Internal Revenue Service determines a worker's status. Whether a person is an employee or an independent contractor depends on the facts in each case.

The general rule is that an individual is an independent contractor if the person for whom the services are performed has the right to control or direct only the result of the work and not the means and methods of accomplishing the result.

For example, an employee's work schedule can be set by the employer; an independent contractor's schedule is set by the contractor. Independent contractors must supply and use their own equipment when performing the work. Using company equipment could change the contractor's status to an employee working for the company.

Here are some guidelines the IRS uses to determine if a worker is an independent contractor:

• If the worker is required to comply with instructions about when, where and how to work, he or she is ordinarily an employee.
  
  
• Integration of the worker's services in the business operations generally shows that he or she is subject to direction and control, therefore generally an employee.
  
  
• If the worker has the right to hire a substitute with the permission or the knowledge of the business, this would ordinarily indicate a contractual arrangement, not an employee relationship.
  
  
• The establishment of set hours of work by the employer bars the worker from being master of his own time, ordinarily the right of the independent contractor.
  
  
• Working full time for a business ordinarily indicates a worker is not free to pursue additional gainful work, which is historically the right of an independent contractor.
  
  
• The furnishing of tools, materials, etc. by the employer indicates control of the worker, hence, an employment relationship.

Another aspect of the question relates to the applicability of the minimum wage law to independent contractors. A Missouri Department of Labor and Industrial Relations FAQ concerning minimum wage states:

Question: Is there any exemption for the small business employer so I will not have to pay the minimum wage?

Answer: The only exemption that applies is for a retail or service business whose annual gross sales are less than $500,000.
(See labor.mo.gov/DLS/minimumwage/ for all minimum wage FAQs.)

A review of the minimum wage regulations (www.sos.mo.gov/adrules/csr/current/8csr/8c30-4.pdf does not show an exemption for an independent contractor. So if the business does not fall into the category listed above or the type of employment is not exempt, most likely the worker should be paid no less than the minimum wage.

For more information on the minimum wage contact the Wage and Hour Program at 573-751-3403; Fax: 573-751-3721 minimumwage@dolir.mo.gov.

Additional sources of information on independent contractors can be found on the Missouri Business Development Program Web site at www.missouribusiness.net/docs/20_tests_employee_contractor.asp or visit the IRS Web site at www.irs.gov/businesses/small/article/0,,id=99921,00.html.

And, be sure to visit the Missouri Business Resource Library for other tools and resources to help with your business needs.

- Information for this article was contributed by MO SBTDC business specialists Mick Gilliam, Charles Holland, Willis Mushrush, Chris Thompson and Virgil Woolridge 12/8/08