(as
published in the Western Business Journal, Summer, 2004)
Small business owners can get in trouble when they classify workers as independent contractors rather than employees in an attempt avoid workers’ compensation premiums. The following story illustrates how problems can arise.
Tom owns a roofing business and wants to hire Stan as an independent contractor (an “IC”). Tom thinks this should be easy enough because Stan has a Certificate of Independent Contractor Exemption from the State Department of Labor. In addition, Tom gives Stan the option of working for $15 per hour as an employee or $20 per hour as an IC. Stan goes for the higher wage as an IC. However, Stan is not necessarily an IC.
This story is taken from a Montana Supreme Court case, Wild v. Fregein Construction, 68 P.3d 855 (Mont. 2003). The Court held that: 1) a worker can be an employee even when the worker has an IC exemption certificate; 2) an employer must make a good faith inquiry to determine whether the worker meets the legal requirements for IC status before hiring the worker as an IC; and 3) an employer cannot offer a worker a higher wage to work as an IC rather than an employee.
In the Wild case, the Court determined that the worker was an employee because, among other factors, the worker was paid by the hour, the employer provided the worker with tools, and the employer retained a great deal of control over the performance of the work.
Montana’s law presumes that a worker is an employee until there are a convincing array of facts showing that the worker is an independent contractor. However, a single factor favoring a finding of employee status is sufficient to establish that the worker is an employee.
An employer who fails to obtain workers’ compensation insurance is subject to penalties, including an amount twice the workers’ compensation premiums that would have been due. Worse, if the employee is injured and the employer has not obtained workers’ compensation insurance, the employer will be liable for the payment of workers’ compensation benefits and the worker can file a lawsuit against the employer for personal injuries.
An employer must be extremely careful before classifying a worker as an independent contractor. An attempt to save some money in the short run through an incorrect classification can lead to severe and crippling penalties.
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