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State of Independence
Contractors regularly enter into agreements that define an individual or entity as an “independent contractor.” This designation can be critically important on multiple levels. Many contractors have found that paying lip service to this label without proper support can come back to haunt the contractor and trigger vicarious liability, imposition of tax liability, and even resulting IRS liens.
Vicarious liability and employees
These questions of vicarious liability raise important questions of liability in tort versus contract. Claims in contract involve the breach of an express or implied agreement between the parties. In contrast, claims in tort involve breaches of duties imposed by common law. An easy example is the general duty that the law requires people to use reasonable care in their activities. When someone sues a driver for negligence in the operation of a motor vehicle, the suit is a claim “sounding in tort” that the driver breached the legally imposed duty to exercise reasonable care while driving.
These distinctions can become quite important in determining the impact of whether someone is an employee. A true “independent contractor” is legally separate from the hiring organization. The acts of the independent contractor do not impose vicarious tort liability on the person hiring that individual or entity. In the case of construction projects, a contractor may still be contractually liable for the quality of an independent subcontractor’s work effort. By comparison, the contractor may not be vicariously liable in tort for the negligence of a subcontractor. Instead, an injured party would need to show that the contractor itself was negligent to establish liability. It should be emphasized that many construction contracts include indemnity, insurance and other risk-shifting contract terms that can change this basic common law landscape.
The tax man cometh
Perhaps more important, failure to properly classify a worker can trigger significant tax liabilities for withholding. In certain cases, the IRS may determine there was no reasonable basis for the classification of a worker as an independent contractor. Such a finding may result in not only imposition of liability for taxes, but also exposure to penalties and interest. IRS tax remedies can extend to imposition of personal liability on the business owners and are often extremely harsh. As such, properly classifying employees and documenting proof of the same can be critical to the viability of your business.
This article is not intended to provide specific legal advice but, instead, as a general commentary regarding legal matters. You should consult with an attorney regarding your legal issues, as the advice will depend on your facts and the laws of your jurisdiction.
|Last Updated on Monday, 01 June 2009 04:24|