1.Do you feel that Karen is an independent contractor or an employee? What is your rationale for this decision?

The differentiation between an independent contractor and an employee is a critical one for any employer to make. Furthermore, this choice can have significant implications for the business regarding additional fees and taxes. In this situation, Karen was initially hired as a temporary employee. Moreover, Karen has functioned as an independent contractor for 5 years. If one were to look at her employment status, they would see that Karen has additional clients outside of the local utility as well as the fact that she has not received benefits or proper tax documentation for this period time. For these reasons, Karen should be classified as an independent contractor for the local utility.

2.What factors do you feel help contribute to Karen being an employee?

The IRS generally makes this determination. The IRS uses three characteristics to determine the relationship between businesses and workers, including the concept of behavioral control that covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means. In addition, financial control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job. Lastly, the type of relationship factor relates to how the workers and the business owner perceive their relationship. If Kerry were to be classified as an employee, her actions should fall under the purview of her employer. In other words, if her employer has the right to control or direct the way her job is done, she is most likely an employee (IRS, 2011)

3.What factors favor her being a contractor?

Kerry may be considered an independent contractor if the services she performs cannot be controlled by her employer (what will be done and how it will be done). This applies even if she is given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed. Furthermore, if no employer-employee relationship exists (regardless of what the relationship is called), you are an independent contractor and Karen’s earnings are generally subject to Medicare and Social Security Taxes for Self-Employed (IRS, 2011). In any event, this is a very interesting question for all involved. Despite the fact that Karen was hired as a consultant acting independently of the utility, she has been working within a relationship with the employer for a long period of time.

4.What are some potential legal implications in the case? What should the utility do to rectify any wrongs in this situation?

Challenges for the employer and the situation include the issues related to government taxes such as Medicare and Social Security. In addition, the employer is bound to pay reasonable benefits to all of its employees equally. If the utility does not do this, and it is determined that Karen is an employee of the utility, and Karen is a legitimate case against the utility to recover the lost benefits. To rectify this situation, the utility should clarify exactly what Karen’s individual situation is, and hopefully with the help of a tax advisor. The advisor may suggest that Karen's work responsibilities be clearly delineated and that she be afforded the requisite benefits. Lastly, all necessary taxes, including payroll amounts for charges such as Medicare and Social Security need to be paid in full.

5.Draft a sample policy for limiting the use of independent contractors that will help avoid issues like this in the future.

The utility in this case should have had an easy-to-follow policy for determining the use of independent contractors in the course of its everyday business. This policy could read as follows: The public utility may require the use of independent contractors in certain situations. This determination is solely at the discretion of the management board of this public utility, and is limited to a period of no more than 6 months. If after 6 months, the individual is still working for the utility, they will automatically be considered an employee, and the necessary federal and local taxes will be recovered from the employee's paycheck on a regular basis.

References

IRS (2011) Employee vs. Independent Contractor – Seven Tips for Business Owners. http://www.irs.gov/newsroom/article/0,,id=173423,00.html Last accessed January 3, 2012.