Employee or Contractor?

In June, I blogged about the theory that the employer-employee relationship is being replaced by a relationship in which workers are hired guns. I argued that the “Hollywood model,” much hyped in the 1990s, still has not caught on and is unlikely to because workers value the security and the continued health insurance they get from regular employment and employers value the creative workers they have identified and cultivated.

On the other hand, there is a definite trend toward the pretense of this arrangement--that is, a relationship in which the employee acts like a salaried worker but contractually is a hired gun. The workers behave exactly like salaried employees, putting in the same 40-hour weeks, working at the same site, answerable to the same supervisors, maybe even wearing a uniform with the company logo, but on paper they are independent contractors. As I acknowledged in the earlier blog, this arrangement helps employers avoid carrying the overhead of a large staff of salaried employees. The company also can prevent its workers from unionizing by arguing that most are independent contractors who have no right to collective bargaining. This actually happened last summer at an Ohio company, Baker Communications.

The Government Accountability Office reported in 2007 that 10 million workers were classified as independent contractors, an increase of more than 2 million in just six years, and certainly many of these new contracts were phony. The Bureau of Labor Statistics has estimated that the number of workers misclassified as independent contractors is as high as 30 percent in some states. One reason the government is concerned about this trend is that it cheats the tax collector of funds that normally would go to the accounts of Social Security, Medicare, and unemployment insurance.

Therefore, the IRS is scrutinizing the tax returns of people who file as independent contractors to make sure that the employment relationship is legitimate. If you are an independent contractor, you need to be sure that your work relationship meets the legal requirements. For example, you can’t be working for the same employer and doing the same work you did on payroll or doing the same work under the same conditions as people who are on payroll.

Ironically, one industry has recently begun to attempt the opposite pretense: that independent contractors were actually regular employees. There’s an obscure provision in United States copyright law, effective this year, that allows musicians to regain control of their work 35 years later, provided they have applied for such control at least two years in advance. You may or may not remember the music of 1978, but it was a very fruitful year for American musicians such as Bruce Springsteen and Billy Joel, and the record companies stand to lose a lot of revenue if they lose the rights to the masters of these performers’ songs.

Therefore, the record companies are arguing that the musicians who recorded for them were not independent contractors and that the recordings were “work for hire,” like the books that I write for JIST as a salaried employee. I don’t know whether there are any other industries that face a similar hazard from using independent contractors. It’s likely that most of them write contracts with explicit work-for-hire terms, as I have sometimes signed in my days as a contractor, so this situation is probably uncommon.

On the other hand, even when contractors are unable to carry away the output of their labors, employers need to consider that the contractors may take their talents and work experience to a competitor. Some employers of contractors attempt to prevent this by inserting noncompetition clauses into contracts, but a contractor with very valuable skills may be able to have such clauses removed. (I was able to do so with a former employer, something that I was unable to do while still a salaried employee of the same company.) Furthermore, noncompetition clauses sometimes don’t hold up in court, or the employer sometimes is reluctant to attempt enforcement, because such a clause undermines the pretense that the employee is a hired gun.