Question

Tom and Mark tell Susan that they are considering expanding store hours and advertising. They wish to concentrate their efforts on management and growth. They wish to hire several workers, but they are uncertain whether or not these workers would be designated as employees or independent contractors. Susan asks Tom and Mark to describe the nature of each position, the hours worked, and the control they exercise over each worker. Jack Walker, Grant Worthington, and Phil Costello are first-rate salespeople who have extensive experience in selling men's clothing. They would each work 40 hours per week and be paid a base salary plus commission. The salesmen would be prohibited from working elsewhere. They would be required to wear suits, and their work schedules would be set by L&S. Paid vacation and sick leave would be given as well. Jack, Grant, and Phil would have no discretion in deciding whether to attend to a customer's needs, and they would have no authority to hire assistants. Nancy Cooke is being employed as an administrative assistant. Her duties will include bookkeeping, ordering, and typing, as well as telephone reception. She will work from 10:00 a.m. to 6:00 p.m., Monday through Friday. Martha Winslow, a seamstress by trade, is being hired to perform the necessary alterations on the clothing. She would be available for appointments on Tuesdays and Thursdays from 6:00 p.m. to 8:00 p.m. and on Saturday afternoons from 2:00 p.m. to 4:00 p.m. Martha would set her own hours in addition to these, depending on the workload. Martha has set a fee schedule covering the various types of alterations performed on a per item basis. Stephanie Russo is a Web page design specialist with a degree in graphic arts. She is being trained to create a Web page for L&S. After that, she will act as a consultant for purposes of Web advertising. Lucy Johnson is being hired to clean the store after hours. She will set her own schedule, and she estimates working 1 to 2 hours per night. Stephanie is being paid on a one-time fee basis for the Web design work and then will be retained on an hourly basis as a consultant. Lucy is being paid a flat fee per night, regardless of the length of time it takes for her to clean the store. Which of these people are employees, and which are independent contractors?

Answer 1

Employees and Independent Contractors

a) The Differences are:

1. Nature of each position: The employee is a worker who is engaged in a contract of service with an employer. She earns a periodic salary based on a fixed time per week, e.g. 40 hours per week, Monday to Friday. On the other hand, a contractor engages in a contract for service. She is engaged for a fee to carry out a specified assignment or project. The independent contractor is self-employed. She can work for many other organizations and for any number of hours.

Hours worked: The employee works some fixed hours per day and per week. An independent contractor does not have any fixed hours of work. She can choose to work more than 40 hours per week.

Control by Employer: For the employee, the employer dictates most of the details about the work. She can be given any work by the employer. She enjoys sick leave and other emoluments. She lacks discretion on which tasks to work on. She does not have "authority to hire assistants." The independent contractor does her work to suit her convenience, but ensures that the customer is satisfied with her work to enable contract renewal.

b) Examples of Employees and Independent Contractors from the case study:

i) Employees:

1. Jack Walker, Grant Worthington, and Phil Costello, salespeople

2. Cooke, an administrative assistant

ii) Independent Contractors:

1. Martha Winslow, a seamstress by trade

2. Stephanie Russo, Web Advertising Consultant

3. Luck Johnson, Cleaner

Explanation:

The general rule for differentiating the two types of workers is that an independent contractor directs the result of the work and not what will be done and how it will be done. Her earnings (fees) are subject to Self-Employment Tax. The employee does not control the result of her work and the tasks, but can control how it will be done. Her earnings are subject to Paye Tax.