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INVESTORS’ CORNER: Independent contractors or employees?

I’ll bet a dollar to a donut that you know someone working as an independent contractor.  Recently made famous in the Uber class-action lawsuit, this is an increasingly common practice.  Independent contractors reflect a change in business practices.  For many, the days of rigid time and workplace commitments are long gone.  Utilizing an independent contractor relationship can offer great flexibility, for both the employer and “employee.”

An independent contractor works independently.  She uses her own judgment and own method of action. The employer cannot control the employed individual except as to the result of the final work product.

What is the issue? The problem arises when employers misclassify employees as independent contractors.  What effect does this have? Workplace misclassification can result in harm to the employed person and to the state.  In short, employers can save money at others’ expense.

By misclassifying employees, employers avoid expenses such as payroll taxes.  Effectively, this allows employers to underbid companies that accurately pay their employees.  North Carolina loses approximately $467 million annually in revenue due to this practice.

The employed person experiences a detriment because, as an independent contractor, the “employee” does not receive unemployment benefits or employee benefit programs, such as health care or retirement.

The lack of benefits is acceptable, if the employed person retains freedom to work independently. However, employers frequently exert control over the independent contractor. The employer manages her workplace details, as if a typical employer-employee relationship existed.  In this case, the independent contractor loses the benefit of freedom typically associated with being independent and receives no workplace benefits to show for it. So, the employer benefits at the employed person’s expense.

What does this mean to you as real estate investor? It is unlawful to misreport and to violate labor and tax laws.  Employers should carefully evaluate the use of independent contractors. Maintaining the freedom inherent in independent contractors is paramount. Contracts should be carefully drafted and reviewed to avoid conflict with labor and tax laws.  The employer must not exert undue influence or control thereby undermining the independent contractor relationship.

Utilizing independent contractors in the workplace is valuable, to both the employers and employed parties.  It allows freedom and flexibility.  But if an independent contractor loses her independence and freedom – while subject to employer control – then a misclassification has occurred.

Attorney Craig Morgan is a member of Metrolina Real Estate Investors Association, www.MetrolinaREIA.com, which provides education, networking, and mentoring to investors in the greater Charlotte area. He can be reached at craig@providencelawcarolina.com.

 

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