It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors.

Generally, a business must withhold and deposit income taxes, social security taxes and Medicare taxes from wages paid to an employee. Additionally, it must pay the matching employer portion of social security and Medicare taxes as well as pay unemployment tax on wages paid to an employee. In most cases, a business does not need to withhold or pay any taxes on payments to independent contractors.

Arizona Businesses often rely upon Independent Contractor Agreements to establish this relationship. These agreements are evidence of intent. They are an important step. But having an agreement is not sufficient. The agreement must be honored. The actual conduct of the parties in the performance of their agreement will be scrutinized should a dispute arise.

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.

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

1. Behavioral: Does the company control or have the right to control what the worker does, where services are performed 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 like how worker is paid, whether expenses are reimbursed, who provides necessary tools/supplies, whether the worker can make a profit, etc.)
3. Type of relationship: Are there written contracts or employee type benefits (that is, pension plan, insurance, vacation pay, etc.)? Is the relationship short term? Does the worker perform services for other businesses? Will the relationship be longstanding? Is the work performed a key aspect of the business?

Businesses must weigh all 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 key is to look at the entire relationship and consider the extent of the right to direct and control the worker. A business must document each of the factors used in coming up with its determination. But even if an employer does all of this in good faith, its determination might not be accepted by a court.

If you have questions about business law, you may schedule a complimentary conference with one of our experienced lawyers by filling out the form below or contacting any of our staff at 602-277-4441.