Excerpt from HR for Small Business

The employment relationship is a mutual, voluntary arrangement between two parties. The employer - which may be a corporation, some other form of entity, or an individual - voluntarily agrees to pay the employee in exchange for the employee's work. The employee - who is always an individual - voluntarily agrees to work for the employer in exchange for pay. The relationship is voluntary in the sense that the law will not force anyone to work for a particular employer.

Since the implementation of the Thirteenth Amendment, forced labor through use of physical restraints, threats of physical harm, or threats of legal action is a federal crime. The prohibitions against forced labor also protect persons from compulsory work to pay off a debt - sometimes called peonage or indentured servitude.

The United Nations International Labour Organization (ILO) has adopted a Declaration on Fundamental Principles and Rights at Work, to which the United States subscribes. The Declaration states that all member nations have an obligation to respect four fundamental rights:

1. Freedom of association and the effective recognition of the right to collective bargaining;
2. The elimination of all forms of forced or compulsory labor;
3. The effective abolition of child labor; and,
4. Elimination of discrimination in respect of employment and occupation.

In general, the employment relationship is voluntary from the employer's viewpoint, in that the employer usually has no obligation to employ anyone in particular. In limited circumstances, however, an employer can be forced to hire a particular individual where, for example, the employer rejected the individual's employment application for discriminatory or antiunion reasons. Additionally, once an employment relationship is established, an employer can be forced to retain or rehire a particular individual as a remedy for violating antidiscrimination or labor laws or if the employee has been in a protected leave status, such as military leave or leave under the Family and Medical Leave Act.

The employment relationship is often thought of as a contract between employer and employee. However, it usually does not take the form of a typical mutual contract, where each party makes a promise to the other, such as, "I promise to deliver goods to you next week if you promise to pay me $1,000 in 30 days." Instead, the employment relationship is sometimes described as a unilateral contract, where only one party (the employer) makes a promise. "If you come work for me, I will pay you $10 per hour." The employee usually does not promise to work. He or she just shows up, works, and becomes entitled to the promised pay. Circumstances where employer and employee enter into a mutual employment contract are discussed in more detail on the following pages.

Employees, Independent Contractors, and Agents

An employer's work force can be classified as employees, independent contractors, or agents.

Employees
An employee is someone whose manner of work the employer has a right to control, even if the employer does not actually exercise that control. An entry-level file clerk will likely be subject to close, daily, or even hour-by-hour supervision and is therefore an employee. So, too, is the president of a large corporation, not because he or she is closely supervised, but because the corporation's board of directors has the right to control his or her work. This right to control is illustrated by the legal terms master and servant traditionally used to describe the employment relationship.

True employees - as distinguished from independent contractors - are sometimes known as W-2 employees, referring to the W-2 form issued to them for federal income tax purposes.

Other types of work relationships include independent contractor and agent. These relationships can overlap somewhat. Although the distinctions may seem technical, they are important because employers have obligations to their employees that they do not have for independent contractors. In addition, employees and agents can impose legal liabilities on the employer that independent contractors generally cannot.

Independent Contractors
An independent contractor, in contrast to an employee, is someone you engage to perform a certain task, but whose manner of work you do not have a right to control. Good examples are professionals such as doctors, lawyers, or financial consultants, and trade persons such as electricians and plumbers. In each of these examples, the independent contractor's work is governed by professional standards, state and county codes, and the like, with which you are probably not familiar. Your lack of familiarity is precisely why you engage an independent contractor instead of doing the work yourself or having one of your employees do it.

Alert!

Whenever a worker's status as an independent contractor could reasonably be questioned, the safest course is to treat that worker as an employee.

Certainly you can tell your independent contractor what it is you want done, and you remain free to dismiss him or her if you do not like the work. But it is the result you are interested in. The actual manner in which that result is accomplished is up to the independent contractor and is not subject to your control.

Independent contractors are issued 1099 forms to report income for federal tax purposes, as opposed to W-2 forms issued to employees. Unlike employees, independent contractors are not subject to income and payroll tax withholding.

Employers sometimes try to classify their work force as independent contractors, rather than employees, in an effort to avoid being subject to laws and regulations that apply to employees. In response, the various regulatory agencies, such as the Internal Revenue Service (IRS), the Department of Labor, the Equal Employment Opportunity Commission (EEOC), the Occupational Safety and Health Administration (OSHA), state wage-and-hour departments, workers' compensation, and unemployment insurance administrators have adopted complex tests to distinguish employees from independent contractors. These tests tend to be biased in favor of an employer-employee relationship - that is, in favor of finding that the person is covered by the particular law or regulation the agency is charged with enforcing. (Tax issues relating to independent contractors are discussed in Chapter 7.)

Quick Tip

Some workers are required by law to work under another's supervision. This is true, for example, in various health care professions. Even though the worker may otherwise qualify as an independent contractor, the duty to be supervised may convert the worker into an employee.

Agents
An agent is someone you authorize to make contracts for you and to bind you to those contracts. Employees can be agents, but employees do not automatically become agents - it depends on what, if any, additional authority you give them. For example, if you told your employee to take a computer to the shop and make arrangements to have it repaired, you have given your employee authority to act as your agent. When he or she signs a work order in your name, you as the principal, not the employee, will have to pay the repair bill.

Similarly, an independent contractor can be, but is not necessarily, an agent. When you engage a landscape architect to prepare a design for the grounds around your new office building, the architect is an independent contractor but not an agent. However, when you then authorize the architect to buy plantings, he or she becomes your agent as well and has the power to obligate you to the nursery.

The consequences of misclassifying an employee or a group of employees as independent contractors can be expensive. For example, the employer might be held liable for income taxes that should have been withheld but were not, for wage-and-hour violations, for retroactive coverage under employee benefit plans, and for back pay, penalties, statutory damages, and interest.