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Are they independent contractors or employees?

For many years, property management firms have been well aware that they can be held liable for the wrongful acts of those they hire and that greater liability is associated with workers hired as employees than exists for independent contractors.

This difference in liability relates in large part to the degree of control over workers' activities. The issue of control also is a primary criterion in the distinction of employee versus independent-contractor status.

The Internal Revenue Service (IRS) has an interest in employment status because of income tax and social security withholding requirements that exist for employees but not for independent contractors. Similar incentives may exist for state unemployment compensation agencies to seek a determination that workers are employees.

The purpose of this article is to provide background information about the employee/independent contractor issue, so that property management firms can better manage the risks associated with employment status. To do so, a hypothetical employment scenario of a property management firm was developed and analyzed.

a hypothetical management firm

The property management firm offers a variety of services for its clients. These services can be broadly grouped to include leasing, maintenance, and accounting/bookkeeping (Figure 1).

The leasing function includes workers that are responsible for leasing space in many buildings managed by the firm and on-site managers responsible solely for one building.

Similarly, the maintenance function includes on-site personnel devoted exclusively to one building or property and specialists, such as plumbers or electricians, who have responsibility for the maintenance of several buildings in the community. In addition to on-site maintenance people and specialists, other workers may be periodically employed for services such as carpet cleaning, lawn maintenance, and window cleaning.

Accounting personnel, property supervisors, and leasing agents are all hired by the property manager. These people often work exclusively for one firm, and to the extent that the property manager has the right to control the manner in which they conduct their respective tasks, they often will be classed as employed. Working in office space, using equipment provided by the employer, and working regular hours set by the employer are also factors consistent with employee status.

On the other hand, all three of these functions could involve an independent-contractor relationship. To illustrate, the accounting function could be handled by a person or firm who works for several firms, works in his/her own office, fully determines the manner in which work is performed, and whose primary responsibility is simply to provide a contracted finished product to the property manager.

Of the 20 common-law tests for independent-contractor status (Figure 2), the concept of control over day-today activities is of particular importance in determining the employment relationship.

Often relatively less control will exist over maintenance personnel who work in multiple buildings managed by the same property supervisor or who also work for other firms. As a result, the issue of employment status is less clear for people such as this, than it is for onsite managers and the people hired by the on-site manager. With respect to the latter, brokers compensated per lease negotiated who work on behalf of several firms are more likely to fit the independent-contractor classification.

The property management firm must decide whether workers in these employment relationships are employed as independent contractors or employees. Often, the rights and responsibilities of employed workers are determined by a formal written agreement.

Motives and risks

Several financially related motives exist which might lead a property management firm to prefer to create an independent-contractor relationship with the workers it hiresi These motives include:

* avoidance of withholding of income taxes,

* avoidance of withholding and payment of FICA (social security taxes),

* avoidance of unemployment compensation taxes,

* avoidance of making contributions on behalf of workers to the company pension fund, and

* relatively less tort liability for the wrongful acts of people working for the firm.

The motives for the workers are in stark contrast to those of property management firms. Workers might prefer to be classed as employees so they could personally pay less in social security taxes, be covered by unemployment compensation rules, and be covered by any company pension plan.

One significant risk faced by either party is that the employment relationship created was not what it was perceived to be. Substantial financial adversity may face the firm that believed it had created an independent-contractor relationship when the employment status is later determined to be that of an employee.

In this respect, it is important to recognize the fact that because the parties have called their relationship employer/ independent contractor does not automatically result in independent-contractor status. It is the common-law tests, and not the agreement of the parties, that ultimately determine employment status. Tax and pension plan determinants Statutory definitions of employees and independent contractors are highly similar, irrespective of whether the area being regulated is income tax, social security taxes, pension plan coverage, or unemployment compensation. A recent U.S. Supreme Court case (Community for Creative Non-Violence v. Reid) states that common law tests of employment status should be utilized by the courts unless statutory language clearly indicates a contrary legislative intent.

For federal tax purposes, two groups of workers have been classified as independent contractors through legislation: direct sellers and real estate agents. However, the legal status of other workers is determined by tests developed through the common law.

No one test is determinative by itself, so dffferent courts conceivably could reach different decisions on similar sets of circumstance. To illustrate how the courts utilize the common-law tests, some leading federal appellate cases reported since 1980 were reviewed to analyze how employment status might be determined in the context of property management firms.

In the MacKenzie case (777 F. 2nd 811 1987), the principal issue was whether full-time union and non-union painters were employees or independent contractors for work performed on holidays and overtime. The firm did not withhold income taxes or social security taxes for such work, and the failure to withhold was alleged to have defrauded the government.

Non-union painters were paid in cash for such work, while painters belonging to the union were paid for straight time "off the books, by separate checks" rather than according to the requirements of the union contract. Union painters received an additional payment for employee and insurance benefits "more or less" equal to what was called for by the union contract.

The court, using the common-law employment tests, decided that both groups of painters were employees, and thus were subject to the previously noted withholding requirements.

Whether workers were covered by company pension plans was the major issue in a number of recent federal appellate cases. The fact that the employer could control "not only the resuit... but also the means and manner of performing the task assigned" led to a worker being classflied as an employee in the Mayeske case.

In contrast, in the Wolcutt case, an insurance agent compensated via commissions earned for policies written was held to be an independent contractor because he owned his own office, selected his employees, and otherwise performed managerial functions, paid many expenses, was responsible for his own licensing, reported income from self-employment to the IRS, and was covered by his own Keogh retirement plan.

The Short and Richardson cases both involved truck drivers who sought coverage under pension plans. Both owned their own trucks and reported their income to the IRS as serf-employed people. Because of many factors giving the company substantial control over their activities, both were determined to be employees covered by a pension plan. This was particularly beneficial for Richardson, who .had paid less than $10,000 into the pension fund and stood to collect up to $160,000 in pension benefits. Vicarious liability cases Tax liabilities are not the only issue in the independent contractor/employee debate. Greater vicarious liability exists for wrongful acts of employees than for independent contractors, primarily because of greater employer control over how work is performed.

Whether those hired by a property management firm are classified as employees or independent contractors influences whether or not the firm can be held liable for workers' acts that injure or damage others. Generally, employers are liable for wrongful acts committed by employees in the scope of their employment. Principals (employers) generally are not liable for the injurious acts of independent contractors they have hired.

However, under the concept of "negligent hiring," a principal may be held liable for the acts of an independent contractor if a non-delegable duty was involved. Non-delegable duties involve matters that cannot be contracted away, perhaps because the work contracted (continued on page 47) (continued from page 45) for involves a foreseeable risk of injury or damages to others. An example would be an independent contractor hired to repair common areas in an apartment complex. If the contractor failed to do the repairs properly and someone was injured, the property management firm could still be liable. Conclusion In many cases, property management firms prefer a relatively high degree of control over workers in order to ensure that property management functions are performed well and in a timely manner. This control over quality may be well worth the extra costs potentially associated with employee status. Moreover, such costs may be budgeted for so long as they are anticipated.

The major negative financial impact of employee status occurs when property management firms have assumed that workers later determined to be employees were independent contractors.

It is important to recognize that the issue of employment status is not determined by the employment agreement alone, but also by the circumstances surrounding employment as disclosed by the testimony of workers. Also, the determination of employment status

FIGURE 2 The Common Test Elements * Instructions * Training * Integration of services into the business * Service rendered personally * Hiring assistants * Continuing relationship * Set hours of work * Full-time work * Work clone on premises * Order or sequence set * Reports * Payments * Expenses * Tools and materials * Investment * Profit or loss * Working for more than one person or firm * Offering services to general public * Right to hire * Right to quit is not solely within the property management firms control because the issue may be initiated by state or federal agencies or by the workers themselves.

Readers should not use the information in this article as a substitute for legal advice. Rather, the employment classification of workers should be determined only with the assistance of competent legal counsel.

Mark Dotzour is associate professor and W. Frank Barton Faculty Fellow in the Barton School of Business at Wichita State University in Wichita, Kansas. He received his Ph.D. in real estate from the University of Texas at Austin.

Donald Levi is the Clark Chair of Real Estate and the associate dean of the Barton School of Business at Wichita State University. He is past president of the Real Estate Educators Association and holds a Juris Doctorate from the University of Missouri-Columbia.

John McBride is associate professor of business law at Wichita State University. He holds a Ph.D. in anthropology and a Juris Doctorate from the University of Kansas.
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Author:Dotzour, Mark G.; Levi, Donald R.; McBride, John
Publication:Journal of Property Management
Date:May 1, 1992
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