Shake’s freelance (independent contractor) agreements, governing the relationship between freelancer and client, contain the following provision addressing the nature of the relationship between the freelancer and the client:
- (The freelancer) is an independent contractor, not an employee of (the client).
- (The freelancer) is solely responsible for all taxes, withholdings, insurance, and any other obligations that may apply to an independent contractor.
The distinction between an independent contractor and an employee has important implications for both parties. Among other things, employers must withhold taxes from employees at both the state and federal level; independent contractors, in contrast, are not subject to withholding, but are required to prepay estimated taxes. Employees are subject to minimum wage requirements (state and federal) and certain other labor laws that do not apply to independent contractors. A worker’s status as a contractor or employee may also have implications for the ownership of intellectual property in some situations.
To determine whether a worker is an employee or an independent contractor, courts and government agencies use a multi-factor test. The IRS examines 11 factors, and individual state agencies may look at additional factors as well. The inquiry focuses on the degree of behavioral and financial control over the worker, and the relationship of the parties.1 No single factor, including how the parties characterize their own relationship, is dispositive.2 However, the written agreement can be persuasive as a manifestation of the parties’ intent.3 Therefore, it is standard practice to include an independent contractor provision in a consulting agreement.
The second sentence of the above language is to clarify that the independent contractor and not the client is responsible for complying with laws and regulations that may apply to the contractor. With respect to taxes and withholdings, this would include, for example, the filing of self-employment taxes.4 With respect to insurance, this could include workers’ compensation or disability insurance and health insurance if applicable; employees of the independent contractor would need to be covered by the contractor’s policies and not by those, if any, of the client.
- See IRS Publication 1779 ↩
- See, e.g., S. G. Borello & Sons, Inc. v. Dep’t of Indus. Relations, 48 Cal. 3d 341, 769 P.2d 399 (1989) (label placed by parties on their relationship is not dispositive of determination of employee or independent contractor status); see also McKee v. Brimmer, 39 F.3d 94, 98 (5th Cir. 1994) (“an employer will not be allowed to escape liability by drafting a contract which labels its employee an independent contractor, but retains employer-like control over him”). ↩
- See, e.g., Stone v. Pinkerton Farms, Inc., 741 F.2d 941, 945 (7th Cir. 1984) (“(w)here . . . the parties define their relationship as that of an independent contractor-principal, and the facts of their relationship support that conclusion, courts will not interfere with the intent of the parties”); see also Estate of Suskovich v. Anthem Health Plans of Virginia, Inc., 553 F.3d 559 (7th Cir.2009) (considering the intent of the parties to determine the type of employment). ↩
- See U.S.C. §§ 1401-1403 ↩