Most of us hire people to do some kind of work on our properties, be it as small as an emergency drain fix or as large as a building addition. Usually these workers are treated as independent contractors, paying them when the work is done. We don’t withhold taxes, Social Security or pay their workman’s compensation insurance. We check their references or use people we have used before. We also use a contract spelling out the scope of the job to be done.
Upwards of 90 percent of the time that will work without any problems. The job will get done to our satisfaction, we will pay them, and we will have few or no problems with our tenants, other contractors or our actual employees.
The other 10 percent of the time, though, we can run up against issue with the IRS, liability and management that can cost us a bundle. In this article we will look at things we need to watch out for concerning whether or not the contractor should be treated as an employee, how far our liability for contractor behavior and shoddy workmanship extends, and the biggest advantage to hiring a contractor.
Contractor or Employee?
The Internal Revenue Service (IRS) provides specific rules about who is an independent contractor and who is an employee. As we hire a contractor, we need to be aware of the differences.
In order to be considered an independent contractor, people we hire must meet all eight of the following criteria.
Facts that provide evidence of the degree of control and independence fall into three categories:
1. Behavioral: Do we control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Do we control the business aspects of the worker’s job? (These include things such as how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Do we use written contracts or do we provide employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Does the relationship continue and is the work performed a key aspect of the business?
We must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” formula or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not irrelevant in another.
We need to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.
The contractor must provide labor and services free from our or our employees’ direction and control over the means and manner of providing the labor and service. That means we can’t stand over them and tell them what to do and when to do it. It also means we can’t specify how the work is to be performed and when the contractor is to work.
For example, if you hired a workman to get apartments ready to rent, you would be safe in providing a list of work to be done and materials to be used, such as clean the carpets and paint the rooms off-white using the Glidden Paint you provided. You could also provide a checklist of items that may or may not need dealing with.
But how specific is too specific? Certainly we have the right to specify paint color, types of materials to be used, items that must be repaired and a date by which it must be completed.
Then there is training. Employees receive specific training in their jobs, while independent contractors are expected to know everything they need to know going in. If we provide contractors specific training, we may have suddenly “converted” them into employees. What is the difference between instruction and specification? Good question.
If were to require and pay for a contractor to take a plumbing class before he could work on our properties, that would obviously make him our employee. Other questions do not have such obvious answers.
On IRS Form SS-8, from which the IRS can determine the employment status of a worker, the question “What specific training and/or instruction is the worker given by the firm?” appears.
What if you showed a contractor exactly how you wanted paint applied in your rental? Is that considered training that would negate his or her status as an independent contractor? What if you showed a landscaper exactly how you wanted the mulch put in? Is that considered training that would negate his or her status as an independent contractor? The fact is, there is no objective definition of “training” as to how it differs from showing what you want done.
Webster’s Revised Unabridged Dictionary defines training as “The act or process of educating; the result of educating, as determined by the knowledge skill. . .; also, the act or process of training by a prescribed or customary course of study or discipline. . . .” That is so nebulous that specifying the rationale for paint color could be considered “training.” Fortunately the IRS looks at other factors, as well, such as how much control the contracting party has over the hours the contractor works. Of course, if you hire a maintenance company to get units ready, it can give its employees training and direction and not affect your relationship with the maintenance company, since the company’s employees are not your employees.
Do we control the business aspects of the worker’s (contractor’s) job? That would include, but not be limited to, things such as how the contractor is paid, whether expenses are reimbursed, and who provides tools and supplies.
Independent contractors often have a significant investment in the facilities and equipment they use in performing work for someone else. If you provide the tools the contractor uses to do the job, that could convert a contractor into an employee.
You may not reimburse a contractor for expenses. Those should be included in the contracted price of the job.
You also may not require that a contractor work exclusively for you. If a contractor works for other parties, or is available to work for other parties, that is one indicator, but not a determiner, that he or she is a contractor and not an employee.
Contractors are paid by the job, while employees are paid at regular intervals. You may pay a contractor at intervals that have to do with the amount of work completed, but not, for example, every two weeks as you would an employee.
Type of relationship
Do you have a written contract or contracts, or pay employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will your relationship continue? Is the work performed a key aspect of the business? That means is what the contractor does part and parcel of your rental business, such as an ongoing relationship to handle tenant repairs.
Answer “yes” to any of these questions, and you could have a grey area as to whether or not your contractor is a contractor or an employee. You can, however, have a long-term contract with a maintenance company or handyman to do work “as needed” on your properties.
Hiring someone to work on your property who does not meet the necessary criteria could mean you end up paying extra. For example, if someone you hired who claimed to be an independent contractor files an unemployment or workman’s comp claim, and the state determines that that person was not legally an independent contractor, you could be forced to pay unemployment assessments, workman’s compensation premiums, unpaid employment taxes plus interest, or all three.
The biggest issue
Tax and workman’s comp liabilities are not the only issue in the independent contractor/employee debate. There are also liability advantages in dealing with in hiring independent contractors.
We have greater liability of the wrongful acts of employees than we do for those of an independent contractor, primarily because of the greater control we have over how employees perform their work. Employers are liable for the wrongful acts of their employees committed by employees in the scope of their employment. Under most circumstances, independent contractors are liable for their own wrongful acts.
That is in most circumstances. As in everything in the law there are exceptions. In this case there are two. The first one is the “negligent hiring” exception. Under this exception, the principal (the person who hired the contractor) may be held liable for the acts of an independent contractor if the principal knew or should have known that the work begin performed by the contractor was shoddy, and someone was injured as a result of that shoddy workmanship. An example would be one where a contractor was hired to make repairs on the sidewalk in the common area of an apartment complex, did them improperly leaving a trip hazard, and a tenant broke his leg after tripping on the faulty sidewalk. In that case, the property owner should have known that the shoddy workmanship could obviously be a danger.
The second one is the “deep pockets” exception. All of us landlords are rich, of course, and it may be that the contractor we hired, who repaired the deck on the balcony of one of the apartments was barely squeaking by financially, didn’t own a home, drove a 14-year-old pickup with wobbly wheels, and had three judgments against him already. So when one of your tenant’s guests falls through the balcony floor and files suit, the lawsuit will not be against the penniless contractor, it will be against you. The tenant’s attorney will find a way to blame the property owner, since the contractor is nigh on to broke, doesn’t have enough insurance to pay for anything, and has left the state.
The biggest advantage
One of the greatest advantages to hiring contractors rather than employees is that you don’t have to keep them if you don’t need or want them anymore. You cannot be sued for such things as job discrimination or wrongful termination. Those laws apply to employer/employee relationships, not contractor relationships.
The only way for a contractor to come back at the person who hired him would be to claim that he was really an employee. That, of course, is another excellent reason to be sure that the contractor you hire is indeed a contractor. In the works of Thomas Y. Mandler, partner in the Chicago law firm of Schwartz & Freeman, “the three most important issues in real estate are ‘location, location, location’; the three most important factors in determining if a worker is an independent contractor are ‘control, control, control.’”