This blog has previously covered the potential pitfalls of classifying workers as independent contractors. While classifying a worker as a “1099” offers many potential benefits on the business side, it can expose the company to significant tax liability, statutory penalties, and monetary damages.
The difficulty for employers is determining which workers may be properly classified as independent contractors. The IRS, Department of Labor, and South Carolina courts all have different tests. On August 9, 2017, the South Carolina Court of Appeals issued a decision that provides some insight on how South Carolina courts make the determination.
In Sellers v. Tech Service, Inc. et. al., the classification issue arose because an employee for an HVAC company sought workers compensation benefits after being injured on the job. The employer’s workers compensation insurance carrier argued that the employee was not entitled to benefits because he received a 1099. However, the fact that a business chooses to treat a worker as a 1099 (or even the existence of a contract stating that the worker is an independent contractor) is not determinative and the court had to investigate the facts further.
The Court stated that “the primary consideration in determining whether an employer/employee relationship exists is whether the alleged employer has the right to control the employee in the performance of the work and the manner in which it is done.” The court identified four factors used to determine the right of control: (1) direct evidence of the right or exercise of control; (2) furnishing of equipment; (3) the method of payment; and (4) the right to fire.”
The Court ultimately found that the worker was an employee, not an independent contractor. The Court’s factual findings on each element are detailed and can be read in full here (SC Advance Sheet, August 9, 2017, pp 14-27). In summary, the Court found:
- The Company had the right to control the time, place, and amount of the employee’s work.
- The Employee wore a company uniform, carried company business cards, and otherwise held himself out as an employee.
- The Company paid for the costs associated with the employee’s work van.
- There was no independent contractor agreement in place.
- The Company furnished employee with the tools/equipment to do HVAC construction/repair.
- Employee received the majority of his income from the Company, and only small amounts for plumbing and other jobs for different companies.
- The Company had the right to fire the Employee.
It is important to keep in mind that in the context of workers compensation benefits, South Carolina’s policy is to resolve any doubts in favor of the employee, which is what the Court did in this case. If this were a tax case before the IRS, or a wage and hour claim before the Department of Labor, the result may have been different. Regardless, this case provides insight into the issues that employers need to address when making classification determinations.
These issues are very dependent on your individual facts and circumstances; please consult with legal counsel when making decisions regarding employee classification.