Contractors, no matter their size, must often make difficult decisions to operate their businesses profitably, while at the same time complying with the law and mitigating risks. Managing financial interests along with finding laborers with adequate skill sets can feel overwhelming for contractors that are trying to grow their business. An often-confusing area is the classification of laborers as 1099 independent contractors. Mistakenly classifying an employee as an independent contractor can lead to significant liabilities for the business and the potential for disastrous lawsuits.
This article focuses on properly classifying workers for purposes of South Dakota’s worker’s compensation laws. A much longer analysis is necessary to comply with IRS regulations.
When faced with the question of whether a worker is an employee or independent contractor for purposes of workers’ compensation, South Dakota courts presume the worker is an “employee until his status as an independent contractor is established.” Jackson v. Lee’s Travelers Lodge, Inc., 1997 S.D. 63, ¶ 10, 563 N.W.2d 858, 861. A worker is an employee until the employer establishes the following:
(1) The individual has been and will continue to be free from control or direction over the performance of the service, both under his contract of service and in fact; and
(2) The individual is customarily engaged in an independently established trade, occupation, profession or business.
To reiterate, the burden is on the employer to prove both elements. In Jackson, the worker performed services for hourly wages, was not free from control or direction, was provided the equipment necessary to perform the job (except for a shovel which the worker provided), was instructed on the work to be done and when to do it and could be fired at will. Based on these facts, the South Dakota Supreme Court determined that for purposes of workers’ compensation laws, the worker was an employee, not an independent contractor.
Unfortunately, contractors often misclassify laborers as independent contractors. To help avoid making that mistake, here are some additional factors that make it more likely that a laborer is an employee and not an independent contractor:
- The worker is paid an hourly wage via weekly or biweekly checks.
- The job/work performed does not require specific skills associated with a recognized profession.
- The worker is not required to have any special training to perform the labor they are hired to perform.
- The worker is not required to have any special education to perform the labor they are hired to perform.
- The worker is not free from supervision and control (a supervisor, foreman, or team leader is keeping tabs on the worker’s work).
- The contractor controls the start and end time for workdays (the worker is not free to do the work on their own time).
- Withholding of taxes.
- The contractor provides the worker with the tools/equipment the worker needs to perform the work.
Whether you are a contractor or worker, understanding the difference between the status as an employee or an independent contractor is essential for limiting liabilities and ensuring proper compensation is paid.
At Lynn Jackson our mission is to understand each client’s goals and provide innovative and practical counsel to achieve valued results. Let us know how we can help. Contact us at (605)342-2592.