Author: LegalEase Solutions

QUESTIONS PRESENTED

Whether a contractor engaged to restructure and renovate a certain building qualifies as an employee or independent contractor?

SHORT ANSWERS

• The Contractor qualifies as an Independent Contractor and not an employee.
• Whether a contractor engaged to do piece work is an employee or independent contractor would depend, among other factors, upon the degree of control exercised by the employer over the contractor. This is more commonly referred to as the Master-Servant relationship.
• Other factors that are held by courts of law as factors in the determination of an individuals employment status include:
  1. The employers right to hire & fire the contractor;
  2. Paying a salary or paychecks to the contractor instead of a fixed price for the entire project;
  3. Whether the employer decides the means to obtain the desired result or end result;
  4. If there is a contract of employment and said contract is not for a fixed term but is open ended;
  5. If the employer provides tools, the training, decides the method of work, and controls the hours of work.

STATEMENT OF FACTS

A doctor (“Doctor”) hired the services of a contractor, (“Contractor”) to reconstruct and renovate a certain portion of a building.  Contractor failed to render quality work as contracted for. The Doctor had to incur additional expenditure to undo the damage caused by Contractor’s work and as a result withheld the remainder of the sum due to Contractor. Contractor sued Doctor for the remaining sum of money under the contract.

Contractor contends to be an employee of Doctor, while the Doctor denies Contractor held any such position and argues that Contractor is nothing but an independent contractor.

DISCUSSION

Whenever a party is employed/engaged to do some work they are engaged as either an employee or independent contractor. The basic difference between the two being the master and servant relationship governs the relationship between the employer and employee, but not the relationship between the hiring party and an independent contractor.

An employee, as the name suggests, is employed by a party we call the employer. The employer is like the Master who commands, and employee is like the servant who follows. The Master/Employer commands not only what work is to be done by the employee, but also how it is to be done.

The independent contractor on the other hand is contracted with to do some specific piece of work. The relationship between the hiring party and the independent contractor is that of two parties to a contract for work, not employment. In this relationship the hiring party exerts less control over the independent contractor than would an employer/Master over an employee/Servant. Therefore, in a contract with an independent contractor, whether written or implied, the degree of control is minimal and is limited to the results of the performance or non-performance of the contracted work.

The relationship of an employer and employee exists when the person for whom the services are performed has the right to direct and control the method and manner in which the work shall be done and the result to be accomplished. This contrasts sharply with that of an independent contractor who is one engages to perform services for another according to the independent contractor’s own method and manner, free from the direction and control of the hiring party in all matters relating to the performance of the work, except as to the result or the product of his work.

1. The criteria for deciding the status of an employee/independent contractor have been settled under Michigan

The Michigan Courts have said that an independent contractor is one who, “carrying on an independent business, contracts to do a piece of work according to his own methods, and without being subject to the control of his employer as to the means by which the result is to be accomplished, but only as to the result of the work. Generally the circumstances which go to show one to be an independent contractor, while separately they may not be conclusive, are the independent nature of his business, the existence of a contract for the performance of a specified piece of work, the agreement to pay a fixed price for the work, the employment of assistants by the employee who are under his control, the furnishing by him of the necessary materials, and his right to control the work while it is in progress except as to results.” Kendrick v Graddis, 75 Mich. App. 383 (1977), Zoltowski v Ternes Coal & Lumber Cp, 214 Mich 231, 233 (1921), See also Utley v Taylor & Gaskin, Inc, 305 Mich 561, 570 (1943).

In an unpublished opinion Linda Anderson v. Fru Con Construction Corp. 125 Fed. Apx. 5; 2004, 2004 U.S. App. LEXIS 26414,  the Sixth Circuit Court further laid down factors to be determined in order to conclude whether a worker is an independent contractor or otherwise, “There are seven factors to be considered in the independent contractor analysis: (1) the right to control the conduct of the work, (2) the right of termination, (3) the method of payment, (4) the freedom to select and hire helpers, (5) the furnishing of tools and equipment, (6) self scheduling of working hours, and (7) being free to render services to other entities.” quoting Bargery v. Obion Grain co., 785 S.W. 2d 118 (Tenn. 1990)

By applying the parameters set by the Kendrick case and the Linda Anderson case, the Contractor in our case would appear to qualify as an independent contractor. Contractor had a separate business of construction and renovation work and is not directly an employee of the Doctor, there exists a contract for some specified piece of work to be completed by Contractor, there is a fixed price or sum the Doctor agreed to pay for the work. The Contractor was to decide to the best of his professional knowledge how the contracted work was to be achieved. The Doctor did not interfere in the everyday process of the Contractor’s work or watch the exact methods employed by the Contractor. It cannot be said that the Doctor was concerned with anything other than the end result.

2. The most important criterion is the amount of control exerted over the Contractor. However, the hiring party must exert more than a temporary, transient, fleeting control over the worker for the worker to be considered an employee.

In Kendrick, supra at 385, while discussing the “simple tool” doctrine, which should be only applicable in the case of an employer-employee relationship, the court held,  “In reviewing the deposition from Mr. Kendrick, the court finds it clear that the defendant exercised no control over him.   Id. at 385.  Thus, the master-servant relationship never arose and Mr. Kendrick was a mere independent contractor. The simple tool doctrine has no application in this case, and the court can find no real issue of fact.”(Emphasis Added).  Id.

The court specifically held that if the worker was the master of his own time in performing the work of producing the ultimate result then the fact that the company inspected the work as it progressed, provided directions for its proper completion, and furnished tools and the like did not change the relation to that of master and servant. “Inspection of the work by defendant lumber company as it progressed, with direction conforming to its proper completion, and the furnishing of tools and a team by defendant lumber company, did not change the relation to that of master and servant.

The question of compensation payable under the Employer’s Liability Act, to workers of a railway company was in issue in Chicago, Rock Island & Pacific Railway Company v. Bond, Administrator of Turner, No. 486, 240 U.S. 449; 36 S. Ct. 403; 60 L. Ed. 735 (1916); wherein the court held, “Although a certain direction or information may be given by the carrier to one contracting with it, if, as in this case, the contract is not the engagement of a servant submitting to subordination and subject momentarily to superintendence, but of one capable of independent action to be judged by its results, and the person so contracting controls the manner of the work done by himself and those employed by him, he is a contractor with, and not an employee of, the carrier within the meaning of the Employers’ Liability Act.” (Emphasis added).  Id. at 455.

Other cases make the point that occasional or temporary direction does not alter the fundamental relationship between the parties, even more clear. In Slessor v. Board of Education of Kalamazoo, 256 Mich. 389 (1932) wherein the independent contractor (Mr. Slessor) was injured while installing gymnasium equipment in a school, the sheer fact that he was working on the job that he had contracted to perform was not enough for the court to hold him to be an employee of the school. The Court held that even though “There was evidence that an employee of the defendant board directed where certain of the equipment should be placed. This was not control of Mr. Slessor but an aid in the performance of his work. Mr. Slessor was not at all subject to the control of the school board. If he declined to submit to suggestions of an employee of the school board that board had no power to discharge him for disobedience. It is the power to control and not the fact of control which is the test.” Id. at 392.

Thus though there may have been a certain degree of direction or control from the Doctor to the Contractor it does not take away, or change, the character of the relationship between the parties. The Contractor was not engaged as a servant of Doctor who had to be guided at every step. The Contractor was a professional qualified and experienced to do the kind of work contracted to be done. It was with this belief that the Doctor had entered into the contract for the said renovation and restructuring. The Doctor intended to merely lay down what was required to be done, mutually decide upon a price and from there on Contractor would ensure that the end result that the Doctor had in mind when entering into the contract was attained.

3. The Michigan Economic Reality Test

There are many factors that determine when an individual or corporation should be considered an employee. The Sixth Circuit Court of Appeals upheld the decision of the District court that held a worker to be an employee of a company, though only on the basis of undisputed facts. The undisputed facts were, 1) existence of an open ended contract between the worker and the company, 2) Company’s sole business was chimney maintenance and repair and each of its workers performed all of the services offered, 3) Company provided tools and materials, 4) worker prohibited from doing any other work outside his employment with company, 5) company marketed, serviced and obtained all of its jobs under its company name and decided the price and method of work & 6) company had hired worker and had right to fire him. Chicago Insurance Company v. Chimnee Cricket, Inc., 17 Fed. Appx. 374; 2001 U.S.

The court also upheld and applied the economic reality test in determining the status of the worker, “The economic reality test has been developed by Michigan courts to determine whether an individual is an independent contract or an employee eligible for worker’s compensation benefits. See Hoffman v. JDM Assocs., 213 Mich. App. 466,(1995). Michigan courts have approved of the use of the economic reality test in cases in which the term “employee” is not defined in an insurance contract.

In addition, Michigan courts have considered seven additional factors when applying the economic reality test: (1) What liability, if any does the employer incur in the event of the termination of the relationship at will?; (2) Is the work being performed an integral part of the employer’s business which contributes to the accomplishment of a common objective?; (3) Is the position or job of such a nature that the employee primarily depends upon the employment for payment of his living expenses?; (4) Does the employee furnish his own equipment and materials?; (5) Does the individual seeking employment hold himself out to the public as one ready and able to perform tasks of a given nature?; (6) Is the work or the undertaking in question customarily performed by an individual as an independent contractor?; (7) Control, although not an exclusive criterion, is a factor to be considered along with payment of wages, maintenance of discipline, and the right to engage or discharge employees. See Hoste v. Shanty Creek Mgt., 221 Mich App. 144, 147-150 (1997) rev’d on other grounds, 459 Mich. 561, 592 N.W. 2d 360 (Mich. 1999): Mckissic v. Bodine, 42 Mich. App. 203, 201 N.W. 203, 302 N.W. 2d 333, 335-36 (Mich. Ct. App. 1972).

Keeping in view all of the above observations made by the Courts, the Contractor does not qualify to be an employee of the Doctor. Contract in question was not an open ended one but for a fixed piece of work, clearly laid down in the contract. Renovation and repair was not the Doctor’s business and Contractor was not prohibited from rendering similar services to others. Payments were not made as salaries or wages to the Contractor but a certain percentage as a deposit before work started and the remaining percentage as of the total fixed contract amount upon completing different portions of the work. Even if we refer to the seven additional factors that Michigan courts consider when applying the economic reality test to qualify as employee, the Contractor does not qualify as an employee of the Doctor. The Contractor does not primarily depend on payment from the Doctor to pay for his living expenses. The Contractor conducts his own separate business, and holds himself out to the public as one ready and capable of performing similar renovation jobs for any one in the public. Also custom dictates that one employ a contractor as independent contractor for such a reconstruction -renovation job and not employ the contractor as an employee.

Once again the above case supports the contention that Contractor was not an employee but Independent contractor. It is important to remember that the Contractor operated its own independent businesses, and did not perform functions that were an essential part of the Doctors’ normal operations, (renovation reconstruction is not normal part of Doctor’s operations) Contractor had its own prior training and experience, and was not trained by Doctor, Contractor did business in the its own name i.e. “Contractor General Construction”.

4. The Doctor did not withhold taxes from the payments he made to the contractor, nor was there any sort of understanding that he would.

 Individuals performing services as independent contractors are not employees. Generally, physicians, lawyers, dentists, veterinarians, contractors, subcontractors, public stenographers, auctioneers, and others who follow an independent trade, business, or profession, in which they offer their services to the public, are independent contractors and not employees.” 26 C. F. R. § 400.205. See also Treasury Regulations 91, 26 C. F. R. § 401.3. (Emphasis added.)  In our case the Doctor did not withhold taxes from the payments made to Contractor and the section that lays down the guidelines for treating worker as independent contractor for taxation as such treated the Contractor as an Independent Contractor as laid down in 26 USCS Sec 530, purposes. Also, in the given case the contract clearly lays down the fixed price for the services to be rendered by Contractor to Doctor, indicating an independent contractor relationship.

CONCLUSION

After discussion of the facts of the current case in question, and in light of the decisions and views held by various courts as elaborated above, the Contractor in the given case clearly qualifies as an independent contractor and not an employee of Doctor. The features of the relationship between Doctor and Contractor that go on to confirm this finding can be summarized as follows:

• Existence of a contract for a specified piece of work
• Fixed price for the services to be rendered and result to be attained, specifically laid down in the contract.
• Contractor had an independent business, under a separate business name (clearly named at the top of the pages of the contract attachments, as “Contractor General Construction”)
• The work contracted for i.e. of renovation/restructuring was not in any way a regular component of the Doctor’s business/profession. It was a one-time work for which customarily anyone would engage an independent contractor and not employ a contractor.
• In the daily course of work the Doctor never exercised as much control over the Contractor as to give rise to a Master-Servant relationship. Little direction or instruction does not amount to controlling the contractor as an employer controls the working of an employee.
• Apart from the toilet and sink named in the contract estimate for plumbing, the Doctor was not required to supply any tools or equipment.
• The Contractor was to solely decide and determine the method of achieving the results named in the contract.
• The Contractor was free to provide services to others.
• For the Contractor this specific job under the contract with the Doctor was not the only means to pay for his living expenses.
• The Contractor was believed to be proficient in the services it professed to provide and needed no training or supervision and as such the very fact that the Contractor was competent to provide the said services and attain the desired result was the basis of entering into the contract between the Doctor and contractor. The very fact of the Contractor being capable of providing the desired services and entailing the desired results has proved out to be false and the very bane of the purpose of the contract in question.

Thus it can be safely concluded that the Doctor was not an employee but clearly an independent Contractor.