Are Independent Contractors Considered Employees?

There are a few general principles to keep in mind when considering coverage for independent contractors under the Longshore and Harbor Workers’ Compensation Act (Longshore Act).

1. The Longshore Act (33 U.S.C. 901 et seq.) imposes an insurance requirement on “employers” in section 904(a).

It states, “Every employer shall be liable for and shall secure the payment to his employees of the compensation payable under sections 7, 8, and 9. In the case of an employer who is a subcontractor, only if such subcontractor fails to secure the payment of compensation shall the contractor be liable for and be required to secure the payment of compensation …”

So, an “employer” must provide insurance coverage for his “employees”.

Section 902(3) tells us that the term “employee” means any person engaged in maritime employment. The Longshore Act, in sections 902(3) and 903(a), provides the status and situs tests for determining what constitutes “maritime employment” and who is a maritime employee.

2. Self-employed individuals (who I am calling independent contractors) are not “employees”.

3. There are no exclusions in the Longshore Act for corporate officers, sole proprietors, business owners (if they are also “employees”), or small businesses.

 

Problem with Applying the Insurance Requirement on Independent Contractors

Terms such as “independent contractor”, “subcontractor”, “sole proprietor”, and “self-employed” cause confusion in applying the Longshore Act’s insurance requirement and establishing entitlement and liability. Self-employed individuals are not “employees” and thus are not covered under the Longshore Act. Resolving the distinction between who is self-employed and who is an employee presents problems.

The distinction has implications for many aspects of employment and tax law, but our issue is what happens when there is a workplace injury. Is there an employer-employee relationship? The answer to this question will determine whether a workers’ compensation law such as the Longshore Act applies to determine liability and entitlement to benefits.

 

How the courts try to resolve the issue

There is no statutory definition in the Longshore Act to help us determine whether a worker is an employee or a self-employed independent contractor. My purpose here is to review and summarize the various ways that courts try to resolve the issue.

The common law has approached the issue by devising a number of “tests” designed to identify the nature of the relationship as to whether it involves an employer-employee situation or whether it involves a principal-independent contractor relationship.

A nine-part test is sometimes referenced as representing the factors to be considered. It is very well designed to complicate the issue, since many of the factors can go either way, and it is never unanimous. For what it’s worth, here it is:

1. Extent of control the employer exercises over the details of the work,
2. Whether or not the worker is engaged in a distinct occupation or business,
3. The kind of work, whether usually done under direction of the employer or by a specialist,
4. What skill is required,
5. Whether the employer or worker provides the tools and equipment,
6. The length of time the person is employed,
7. The method of payment, i.e., by time or by the job,
8. Is the work part of the regular business of the employer,
9. The intent of the parties.

NOTE: This test is similar to the one often used to determine whether a claimant is a borrowed employee, from Ruiz v. Shell Oil Co., 413 F.2^nd 310 (5^th Cir. 1969) and Gaudet v. Exxon Corp., 562 F.2^nd 351 (5^th Cir. 1977).

Another approach is the “right to control the details of work” test. There are four elements:

1. The right to control the details of the work,
2. The method of payment,
3. The furnishing of equipment,
4. The right to fire.

The “relative nature of the work” test, as stated by commentator Professor Larsen, is: “… the character of the claimant’s work or business – how skilled it is, how much of a separate calling or enterprise it is, to what extent it may be expected to carry its own accident burden and so on – and its relationship to the employer’s business, that is, how much it is a regular part of the employer’s regular work, whether it is continuous or intermittent, and whether the duration is sufficient to amount to the hiring of continuous services as distinguished from contracting for the completion of a particular job”.

Clearly, a great deal of judicial energy has been devoted to resolving the question as to whether or not there is an “employer-employee relationship”. There is a lot at stake. A negative answer will possibly deprive the court of subject matter jurisdiction in a workers’ compensation case and will deprive the worker of any benefits of the workers’ compensation law.

It’s like putting a puzzle together, but there are very serious real-world consequences to how the final picture appears.

The rights of the injured worker hinge on the outcome.

The employer’s obligation to provide workers’ compensation insurance also depends on the outcome. The failure on the part of the employer to meet this obligation may involve possible criminal prosecution and personal liability for corporate officers.

The insurance carrier must accurately determine the amount of exposure it is underwriting.

 

Are these standardized approaches the best solution to this problem?

The “tests” perhaps can be simplified in order to sort out the key elements in determining the true nature of the working relationship. For example:

• Does the company control what the worker is doing, or does he have a wide range of judgment and discretion as to how the work will be performed?
• How is the worker paid? Does he submit invoices for reimbursement, is he paid by IRS Form 1099, or is he paid by payroll check with deductions for taxes and employee type benefits such as vacation and insurance?
• Who supplies the tools and equipment?
• Is it a short-term relationship only for a particular job?
• Is there a written contract?

These are common sense questions in trying to determine if there is an employer-employee relationship. Unfortunately, it is not unusual for some indications to go one way and others to go the other way.

There are other levels of complexity that arise when you are working through this type of scenario, such as:

• Is the “independent contractor” incorporated in his own business?
• Is this independent contractor, with respect to the Principal in our primary inquiry, an “employee” of this corporation?
• What workers’ compensation insurance coverage does this corporation have?
• Is there a contractor/subcontractor relationship with our Principal under Section 904(a)?
• Can our independent contractor be considered the “borrowed employee” of the Principal (back to our tests)?
• Can our employee/independent contractor have two employers (as opposed to none)?

 

While this aspect of the Longshore Act is open to interpretation, one can see how difficult it can be to sort out the rights and obligations when the nature of the employer-employee relationship is at issue.