The Entrepreneurial Mind

Next Tuesday the Vermont Supreme Court will hear oral arguments for a case that will determine the fate of independent contractors in Vermont, who in the present case are individuals that knit patterns for a local apparel firm, Fleece on Earth.

The Federal rules governing who can be considered an independent contractor have gotten much more stringent. In the 1980s, the IRS tended to give employers the benefit of the doubt in determining independent contractor status. If you met enough of the criteria, they tended to leave the employer along. But, those rules have gotten much tighter over the past twenty years. Now any waiver from their criteria and you run the risk of the wrath of the IRS, including assessing past FICA tax employer matches and federal unemployment taxes on all disallowed employees (and penalties, and interest).

According to the IRS:

A general rule is that you, the [employer], have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.

Courts generally rule on independent contractor status using a variety of specific factors including (from LegalZoom):

- If the worker supplies his or her own equipment, materials and tools

- If all necessary materials are not supplied by the employer

- If the worker can be discharged at anytime and can choose whether or not to come to work without fear of losing employment

- If the worker control the hours of employment thus indicating they are acting as an independent contractor

- Whether the work is temporary or permanent

- What is the degree of control over work and who exercises that control?

- What is each party's level of loss in the relationship?

- Who has paid for materials, supplies and/or equipment?

- What type of skill is required for work?

- Is there a degree of permanence?

- Is the worker an integral part of the business?

Bonny Dutton, owner of Fleece on Earth in North Chittenden, Vermont, contracts with individuals throughout the state to knit patterns for her shop. Many of the knitters are retirees and all work on their own schedules, use their own tools, have no deadlines and do their knitting from whatever location they choose.

Dutton considers these knitters to be independent contractors. But the Vermont Employment Security Board has declared that these individuals are Dutton's employees, and is demanding that Dutton pay back taxes and unemployment insurance for these workers. Dutton fought this ruling in court, and the National Federation of Independent Business Legal Foundation filed an amicus brief urging the Vermont Supreme Court to side with Dutton, and save the status of independent contractors in Vermont.

The Vermont law governing independent contractors establishes a three-part "ABC" test for determining whether workers are truly independent contractors or employees. The law requires, A) workers must be free from control or direction from the contractor; B) the service provided by an independent contractor must be outside the usual course of business; and C) the worker is generally engaged in some sort of independent occupation.

The Vermont State Employment Board argues that because Dutton reserves the right to accept or decline products produced by the knitters, this demonstrates control or direction by Dutton, thereby violating part "A" of the test. The knitters, most whom have never even been to Dutton's store, consider themselves to be independent workers and do not believe Dutton acts as an employer.

If this ruling goes against Dutton, it runs counter to the general guidelines defined by the IRS which clearly allows for the control of "the result of work." But its only Vermont, right? Maybe, and maybe not. All of this stuff gets decided in courts. And judges have a funny habit of changing how things work, as we have already seen how they interpret federal statutes dealing with independent contractors.