Employee & Contractor Definitions #

Employment status is a topic where fairness and legality align closely, because the law defines certain cost burdens and decides on whom that burden falls—either the business owner or the worker. Employees are subject to minimum wages, overtime requirements, and other benefits as required by law, and employers must pay a share of payroll taxes and withhold additional taxes from each paycheck. Independent contractors are entrepreneurs in business for themselves. As the Economic Policy Institute says,

Employer misclassification of workers as independent contractors robs workers of labor rights and threatens their economic security…. [W]orkers misclassified as independent contractors lose out on thousands of dollars in earnings and benefits per year, compared with workers doing the same job with employee status.

Many farm employers inappropriately classify their workers as independent contractors (1099) when they actually qualify as statutory employees (W-2). The motivation frequently stems from a farmer’s desire to simplify their bookkeeping and payroll systems and avoid paying their share of payroll taxes. In addition to being illegal, this practice shifts the burden of payroll taxes entirely onto the employee. In such a case, an employee may accept a farm job with an offer of making a certain hourly rate, only to find out when they file their taxes that they owe 15.3% self-employment taxes on their entire season’s earnings, possibly with additional penalties for not making quarterly pre-payments. If that employee declines to report their taxable income, not only do they risk enforcement from the IRS, they may jeopardize their access to health insurance and other benefits tied to annual income tax returns.

Here is the IRS’s guidance on deciding whether someone you hire qualifies as an employee or an independent contractor:

It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors…. In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.

Common Law Rules

Facts that provide evidence of the degree of control and independence fall into three categories:

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

Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

If you classify an employee as an independent contractor and you have no reasonable basis for doing so, then you may be held liable for employment taxes for that worker…

Quoted from IRS.gov. “Independent Contractor (Self-Employed) or Employee?”

The US Department of Labor offers additional, more detailed guidance based on the six factors of their “economic reality test.” For farm operators hiring laborers, these principles stand out:

• If a laborer is engaged in the primary work of the business, they’re probably an employee. If the business is a farm and a worker does typical farm work such as planting, harvesting, washing, packing, etc., or a diversity of farm jobs, they’re probably an employee. If a worker is providing limited services such as accounting or tractor work or mechanical repairs, they may be an independent contractor.
• If a laborer is providing a service primarily to one business, rather than actively marketing their services to additional clients, they are probably an employee. If a bookkeeper or tractor operator or mechanic advertises their services to other businesses, as well, they may be an independent contractor.
• If a laborer’s only way to increase their income is by working more hours, rather than streamlining their services, reducing their costs of providing services, or setting a higher price for their services, they’re probably an employee.
• If a laborer is not making capital or entrepreneurial investments, such as tools of the trade, business insurance, advertising, business vehicles, office space, etc., they’re probably an employee. If a worker optionally uses their own preferred tools, that’s not sufficient to classify them as a contractor. If a tractor operator uses and maintains their own equipment, they may be an independent contractor.
• If a laborer is subject to hiring and firing, supervision and performance evaluation, discipline, etc., they’re probably an employee.

If an employer has to do a lot of mental gymnastics to classify a worker as a contractor, that’s a good indication that the worker is probably an employee. USDOL offers this warning:

[C]ertain facts…are not relevant to whether an employment relationship exists. What the worker is called is not relevant—a worker may be an employee under the FLSA regardless of the title or label they are given. A worker who is paid off the books or receives a 1099 is not necessarily an independent contractor, and agreeing verbally or in writing to be classified as an independent contractor—including by signing an independent contractor agreement—does not make a worker an independent contractor under the FLSA. Additionally, such facts as the place where work is performed, whether a worker is licensed by State/local government, and the time or mode of pay do not determine whether a worker is an employee or an independent contractor under the FLSA. (Emphasis added.)

Many businesses have tight or negative margins, but that does not justify unfairly shifting costs onto workers. If a business cannot afford to pay the costs of having employees, it may be time to seek out coaching and revisit the business plan.

For more information see Fact Sheet 13: Employee or Independent Contractor Classification Under the Fair Labor Standards Act (FLSA); US Department of Labor or the DOL’s Small Entity Compliance Guide, which includes common questions and answers.

Note: There are very slight differences between the definitions of “employee” used by the IRS and the Department of Labor. The IRS definition decides a worker’s filing status and thus who pays which taxes. The DOL definition determines the rights a worker has under the law. Seek professional legal advice in the very rare cases where the two definitions lead you to different conclusions.

General Definition of Interns/Apprentices/Trainee #

Internships are not a way for employers to acquire cheap labor. Taking on interns (apprentices, trainees) is a commitment to providing a real learning experience and means that the farmer will be acting as teacher as well as employer. AJP standards require farms to provide a clear labor agreement to interns, spelling out wages, hours and expectations, and a learning contract in which the intern spells out what he/she hopes to learn. Farmer and intern should review this learning contract mid-season to make sure the learning is taking place, and again at the end of the season. It is as much a review of the farmer as teacher as of the intern as learner. (Standard 3.6.1-2.)

Note that laws covering internships where interns are paid less than minimum wage typically require 1) that interns access significant educational opportunities, and 2) that interns not do work that would otherwise be done by a regular employee. Consult legal guidance for your state to make sure you are complying with the law. If an employer is unsure if the terms of an internship meet legal requirements, they should treat “interns” as full-status employees.

For more information and resources on internships, see the Apprentices & Youth section of the toolkit.

Who Is Considered Hired Labor by AJP #

In our consultations with farmers, we have often been asked about whether different kinds of help they receive on the farm count as hired labor, so we offer this definition of hired farm labor.

For the purposes of Food Justice Certification, hired labor does NOT include:

• Immediate family members (parents, children, siblings and their children) unless they are on the official farm payroll
• Volunteers – crop mobs, school, club or church groups who work for a few hours or a day, CSA members who do work in exchange for food or a reduction in share price
• Educational programs and tours including short term work stays
• Work trades or barter relationships with neighbors, relatives, or friends

Hired labor does include:

• Full time employees
• Seasonal employees
• Part time employees, even very part time employees, if they work mainly to earn money rather than to learn
• Interns and apprentices (refer to intern standards 3.6 for specific expectations on compensation and requirement for a learning contract)
• See Standard 3.2 on Child Labor
• Contracted labor – through Farm Labor Contractor or Crew Leaders (refer to special contracted labor and labor contractor standards)
• Independent Contractors (standards 3.1.13.c and d and 4.1.12.c and d cover independent contractors)