September 22, 2020
By: Colin A. Walker
A common strategy to try to manage costs of a new business is to retain workers as independent contractors (sometimes misleadingly called “1099 employees”), rather than as employees. However, not all workers can be retained as independent contractors. Independent contractors must be in an independent trade or occupation and must control the means and manner of performing the services. The IRS and the laws of many states provide multi-factored tests to determine whether a worker is an independent contractor. Many companies have been penalized for misclassifying employees as independent contractors and the U.S. and state Departments of Labor have been investigating use of independent contractors aggressively.
C-Level executives often are in an independent trade or occupation. For example, a CFO may be an accountant, which is clearly an independent trade or occupation. Many C-Level executives do control the means and manner of performing the services. Again, with a CFO, neither the CEO nor the Board of Directors are likely to micromanage the financial activities of the executive.
There are some circumstances where a C-Level executive can be retained as an independent contractor. A CFO retained on part-time basis, who also works with other clients, or on a full-time but temporary basis until a full-time CFO can be hired, would probably qualify an independent contractor. However, even high level executives are likely to be employees if they are working full-time for an indefinite period of time.
It is also more difficult, and sometimes impossible, to enforce non-compete agreements with independent contractors. Great care must also be taken to protect intellectual property created by independent contractors.
The safest course for a business is usually to hire workers, including C-Level executives, as employees. If the business believes that there are good reasons to retain an executive as an independent contractor and that it can lawfully do so, it should be careful to document this in a well-written independent contractor agreement, and be prepared to demonstrate that the standards have been satisfied in the event of a Department of Labor audit.