The Independent Contractor

The Independent Contractor

The following article provides some up-to-date information on the independent contractor status. Business brokers in states requiring real estate licenses are probably safe. The real estate lobby through the National Association of Realtors (NAR) is powerful and has battled the appropriate federal committees and those in Congress. The real estate industry is the only business exempted, as far as I know. I believe that real estate agents are really employees: they work for only one employer; they must follow the dictates of the owners of the firm; they can’t work for any other firm at the same time; the list goes on. So, it follows that agents that work for business brokers and follow the same rules would also be exempted from independent contractor regulations. The states really call the shots since they require a real estate agent to follow certain rules and be employed by only one broker, etc.

In states where a license is not required, business broker agents could possibly be considered employees. They generally follow the same rules as the real estate profession, but do not receive the protection of the NAR. When I was president of United Business Investments in California (it is a license state) and we had offices in about eight states, we elected to convert all of our agents to employee status. As the country’s biggest business brokerage firm, our concern was that if the federal and/or state governments wanted to test the independent contractor status, we would be their first choice as a testing ground. Yes, we had to pay social security payments, withhold taxes (state and federal in most cases), pay unemployment, workman’s comp, etc. The biggest plus was that we could offer group medical insurance. No one left, since like today that was a big plus. Also, at the end of the year, their taxes were usually up to date. We could make our people officers of the company, provide stock options, etc. They were still on straight commission except for the office managers who received some compensation. We also had legitimate control of our salespeople – a big plus. Since government needs all of the revenue they can get, the independent contractor status could be in for a rough ride. If you’re in a non-license state, I would suggest you have all of your people get their real estate licenses. At least you will be able to hide behind the NAR.

The Independent Contractor

As the federal government and the state governments look for more ways to bring in money, the independent contractor status is a likely place for them to look. After all, by using independent contractors rather than employees, employers don’t have to withhold taxes, provide workers’ compensation, contribute to unemployment compensation, or provide any benefits such as 401-k programs, health insurance or other benefits. Plus you can use and discontinue independent contractors as needed.

Certainly, in this age of home-based businesses, the use of outside sources makes a lot of sense. Outsourcing a lot of business needs has been done for years and will only increase with growth of small business. Most one-person and small businesses don’t need full-time employees. Many requirements can be outsourced to independent contractors who in turn outsource many of their requirements.

It is the use of workers who are classified as independent contractors, but are really employees that can cause legal issues. FedEx Ground has been in the middle of this type of legal dispute for several years. FedEx claimed that their drivers were franchisees and therefore independent contractors; several drivers (and later the IRS) challenged that status, claiming that the drivers were really employees.

Here are some basic distinctions between independent contractors and employees:

  • Lack of employers’ direction is one major difference. In other words, the worker is left to his or her devices and does what the particular job requires without direction from the employer.
  • Is the worker working primarily for one employer or working for several employers on an as needed basis?
  • The worker is not in the same general business as the employer. A full-time consultant in the same line of business as the employer might be considered an employee. If the employee has his or her own business and also works for other companies, he probably would be considered an independent contractor.
  • Just because the worker creates an LLC or even an S-corporation doesn’t necessarily protect both sides from being classified as an independent contractor.

The federal government and the states are narrowing the definition of an independent contractor. One must definitely be truly independent to be considered an independent contractor. FedEx franchises (for lack of another term) wear FedEx garb, have FedEx logos on their trucks, and deliver FedEx packages on defined routes. However, we understand that they buy their own trucks and can sell their FedEx routes. But, consider the old saying: If it looks like a duck, acts like a duck and makes duck-like noises, there is a very good chance it is a duck. The battle goes on, but the penalties for violating the status of your people can be very expensive.