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The Green Sheet Online Edition

August 09, 2010 • Issue 10:08:01

Agent or employee: Which are you?

By Adam Atlas
Attorney at Law

Many agents who think they are independent contractors are actually employees and vice versa. Most relationships between individuals and ISOs in our industry are either independent contractor or employment relationships.

Between the paperwork underlying these relationships and the facts surrounding the actual working conditions, it is sometimes difficult to know the differences between a contractor (sometimes referred to as an agency) and employment relationship. The purpose of this article is to sensitize readers to indicators that may help characterize a relationship as one or the other, as well as highlight some reasons why this difference is important.

Independent contractor versus employee status

In the simplest possible terms, an employee is someone who is more under the control of the employer, while an independent contractor is less under control of the employer and is more independent. The facts of each individual scenario will determine, in most cases, which you really are. Those facts can be divided into three categories:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

  2. Financial: Are the business aspects of the worker's job controlled by the payer? (These include things such as how the worker is paid, whether expenses are reimbursed and who provides the tools and supplies.)

  3. Type of relationship: Are there written contracts or employee-type benefits such as a pension plan, insurance or vacation pay? These are only general headings of the criteria by which someone could be characterized as an employee or agent, but they should give you a sense of the general differences.

Implications for employers

The main implication for an employer of someone being characterized as an employee rather than as an independent contractor is that the employer will be liable for employment taxes on the wages paid to the employee.

Other considerations include minimum wage requirements, insurance implications, obligation to pay expenses related to the work performed, state laws concerning working hours and breaks, and many other issues. In short, an ISO that wants to have agents characterized as independent contractors and not as employees will likely be invested in that characterization and will not want it to be overturned.

Implications for employees

The employee who thought he or she was an independent contractor will have his own tax ramifications, such as the inability to deduct expenses that an independent contractor would be able to deduct.

On the other hand, employees may have rights under labor laws that do not apply to independent contractors. It should be noted, however, that a number of states have labor codes that also afford certain protections to independent contractors, including some that deal specifically with the role of salespeople.

Making the determination

Until someone is audited, the nature of the relationship is defined by the parties to any given agreement. The parties may carry on under the assumption of one relationship. However, they might be forced into another category by a tax audit by a governmental entity such as the IRS.

State departments of labor also frequently audit businesses to determine whether, among other things, they are treating employees as employees. You never want a third party to categorize relationships you have already established in a different way than you have.

Having a relationship's status changed in such a way could disrupt your business, place the credibility of your or-ganization in jeopardy and pose unexpected expenses for your company.

Relevance of contractual language

In this particular area of law, the title of your agreement and even the wording of your agreement will not necessarily help to flip your relationship into the category you desire. The auditor will likely rely more on the facts of the relationship than the paperwork the parties signed to create the relationship.

This is not to say that written agreements are without value. Instead, I am saying the facts can easily trump the contract. For example, if you have an independent contractor agreement, but you spend all day following instructions from one individual at the ISO, you use the ISO premises and material, you rarely leave the ISO's office to carry out your work and you make few independent decisions, then you will very likely be characterized as an employee.

Norm for the industry

Our industry has no specific model that is necessarily the norm. Based on my work with several hundred ISOs, I believe most of them retain sales agents as independent contractors, but there are many ISOs that use only employees.

The relationship that is right for you is a matter for discussion and negotiation with your counterparty.

The best way to avoid a surprise in this regard is to have your agreement and the facts surrounding your relationships reviewed by local counsel capable of advising you on the nature of the relationship. The Green Sheet, Inc.

In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, email Adam Atlas, Attorney at Law, at atlas@adamatlas.com or call him at 514-842-0886.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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