Employee vs. Independent Contractor

The Fifth Circuit recently reviewed the standards used to determine whether one who works for a company is an independent contractor or an employee. Thibault v. BellSouth Telecommunications, Inc., — F.3d —, 2010 WL 2891603 (5th Cir. July 26, 2010).

The case involved an electrician, Louis Thibault, who did post-Katrina repair work on electric lines for BellSouth, a regional power company. BellSouth was in charge of designing and implementing the rewiring plan for New Orleans. Thibault worked as a line splicer for BellSouth for three months. During that period he worked eighty-four hours a week with thirteen days on and one day off. Thibault received all his work orders from BellSouth. Thibault claimed he was an employee of BellSouth and therefore should have received overtime for his work. BellSouth deemed Thibault to be an independent contractor and therefore did not pay him overtime.

In analyzing whether Thibault was an independent contractor, The Fifth Circuit identified the key legal question as “whether the alleged employee so economically depends upon the business to which he renders his services, such that the individual, as a matter of economic reality, is not in business for himself.” The Court specifically stated that the “contractual designation of the worker as an independent contractor is not necessarily controlling.” Instead, the Court focused on the following five factors:

  1. The permanency of the relationship.
  2. The degree of control of control exercised by the alleged employer.
  3. The skill and initiative required to perform the job.
  4. The extent of the relative investments of the worker and the alleged employer.
  5. The degree to which the worker’s opportunity for profit and loss is determined by the alleged employer.

The court concluded that Thibault was an independent contractor because his relationship with BellSouth was temporary, BellSouth exercised no control over Thibault’s actual work, splicing is a technical job for which BellSouth provided Thibault no training, Thibault brought all his own equipment to his work for BellSouth, and Thibault’s profitability depended upon his own ability to control costs.

The lesson to take from this case is that it is not safe to assume that a person is an independent contractor without applying the five-part analysis set forth above. An employer who wrongly categorizes a worker as an independent contractor will be responsible for both the employer and the employee’s portion of payroll taxes, not to mention the payment of overtime. Although the tax savings resulting from treating a worker as an independent contractor rather than an employee may be huge, so may be the fiscal consequences should the employer’s assumption of independent contractor status be wrong.