Treating Construction Workers As Contractors Or Employees

The Idaho Supreme Court recently clarified the standards for determining whether individuals employed to do specialized construction work are employees or independent contractors for the purpose of unemployment insurance in Idaho. In Excell Construction, Inc. v. State of Idaho Dept. of Labor, decided in June, the Court held that a sheetrock contractor may be able to classify certain of its workers as independent contractors rather than employees and thus avoid paying unemployment insurance taxes, etc., on their behalf. The Court’s decision expanded the basis upon which a worker could be classified as a contractor and not an employee. The Court emphasized that the distinction between employees and independent contractors depends upon the amount of control exercised by the employer over the details of the “employee’s” work and whether, based upon the circumstances surrounding each worker’s employment, the worker can be characterized as carrying on an independently established trade, business, profession, or occupation.

In the decision, a drywall contractor permitted its drywall hangers and tapers to elect whether they wished to be treated as employees or independent contractors. For those who elected employee status, the contractor deducted taxes and social security from their paychecks and paid unemployment insurance taxes to the State. The contractor made no such deductions and payments for those who elected independent contractor status. The Idaho Department of Commerce and Labor determined that the hangers and tapers were in fact employees for the purpose of the unemployment insurance statute and ordered the contractor to pay past taxes and penalties. The Idaho Industrial Commission affirmed that determination.

The Supreme Court reversed the Commission’s conclusion that the contractor exerted more control than one would expect over a non-employee. The Court, however, sent the case back to the Commission to determine whether the hangers and tapers were engaged in an independently established business, trade, occupation, or profession. The Court suggested, at least implicitly, that while the issue of control may be determined on a company-wide basis, the “independent business” inquiry requires a more narrow review of the facts surrounding the work performed by each individual, or clearly-defined group of similarly-situated individuals.

The Court emphasized that the “independent business” inquiry requires an individualized determination. The Court indicated that evidence disregarded by the Commission on one basis was nevertheless important in making an “independent business” inquiry. For instance, in determining that the contractor retained too much control to classify the hangers and tapers as independent contractors, the Commission disregarded evidence that at least three of the installers had independent businesses registered with the State because it found that those three instances were outweighed by “the rest of the evidence.” The Supreme Court held that evidence disregarded for one purpose was nevertheless relevant to whether each of those individual workers were in fact engaged in an independently established business.

The Court’s analysis is informative for employers in structuring relationships with workers under unemployment insurance statutes. The Court’s opinion may encourage contractors to treat more workers as independent contractors. Given the high costs associated with compliance with many government-mandated programs, including indirect administrative costs, it is not surprising that many employers are willing to explore new ways of structuring relationships with their workers. In Excell, a drywall contractor was able to convince the Supreme Court that despite the presence of a number of facts which are consistent with an employer-employee relationship, it may nevertheless be permissible to treat workers as independent.

However, the costs associated with trying to ensure that any specific business structure will pass muster under the statute might be as high as or higher than the costs of paying unemployment insurance taxes and complying with the other statutory requirements. For example, workers may likely qualify as independent contractors by having them bid on each job and by entering into individual subcontracts for each project, and further by only employing those who have state-sanctioned independent businesses. Of course this no doubt raises the cost of the work to the employer/contractor and limits the number of workers who are eligible to compete for any given job. In effect, while the Excell case certainly increases the likelihood that a given worker may be considered an independent contractor, the costs of ensuring that status may not be significantly different than the indirect costs of hiring and maintaining an employee.