Instead of hiring employees to perform all work on the farm, many pork producers contract with independent contractors to perform certain services. For example, a pork producer may contract with an independent trucker to transport pigs from a nursery to a finishing barn or from the finishing barn to the packing plant. Or a pork producer may contract with another company to perform power washing or manure pumping services. But while these independent contractor relationships may provide important business benefits, they also pose a risk that a person performing services may be misclassified as an independent contractor and is instead an employee. And this misclassification may expose the employer to significant liability for failing to comply with laws applicable to employees (such as tax withholding and immigration laws).
This article published in the recent Pork Bits publication provides a brief summary of important issues pork producers should consider when dealing with independent contractors:
Correct Classification. First and foremost, potential employers must determine whether the services they pay for from an individual are for services of an independent contractor, not an employee. There is a 20-factor test utilized by the Internal Revenue Services to distinguish between an independent contractor and an employee. The Minnesota Supreme Court in Guhlke v. Roberts Truck Lines, 128 N W. 2d 324 (Minn. 1964) established a simpler 5-factor test, which is as follows:
- Right to control the means and manner of work performance – the more control the agricultural operation has over the individual performing the work, the more likely the individual is an employee and not an independent contractor;
- Mode of payment – wages and salary favor the finding of an employee, whereas independent contractors bring their own to complete a service;
- Furnishing of tools and materials – employers typically provide their employees with the tools and materials necessary to perform their jobs, whereas independent contractors bring their own to complete a service;
- Control over the premises where the work is done – the requirement that work be performed on the individual’s premises may favor the finding of an employee rather than an independent contractor; however, this factor is not dispositive; and
- Right to discharge – regardless of the employment at-will laws of the state where services are provided independent contractors can only be terminated/discharged under the terms of their contract.
Pork producers should be familiar with these factors and determine whether each individual performing services for them is an employee or independent contractor.
The importance of correctly classifying working as independent contractors or employees is especially important in complying with immigration laws. It is a federal crime for an employer to “hire for employment in the United States” an employee without verifying (through the I-9 process described in the article above) that the employee is eligible to work in the United States. These verification requirements do not apply to independent contractors, although a person also commits a federal crime if he knows a person providing labor under a contract is not authorized to work in the United States. Thus, pork producer has greater obligations, and faces greater liability, if a worker is properly classified as an employee rather than an independent contractor.
Pork producers should also be aware that it is a crime to harbor (such as providing housing) or transport an unauthorized alien. Accordingly, a person who provides housing or transportation to persons providing services under an independent contractor agreement may assume greater obligations and potential liabilities than in other contractor circumstances.
The Contract. Pork producers and also minimize their exposure to liability arising from independent contractors’ failure to comply with applicable federal, state, and local laws by establishing relationships only through written contracts. Despite the fact that the term “contract” actually appears in the phrase “independent contractor” many agricultural operations and organizations do not execute an actual written contract with independent contractors for their services. Such is a major loss of an opportunity to minimize the operation’s exposure to criminal and civil liability for an independent contractor’s actions. Generally, independent contractor agreements should contain provisions governing the following aspects of the relationship:
- Services and tools – identification of what the independent contractor is to perform for the agricultural operation and, if it is staffing, a requirement that the independent contractor will be responsible for providing the supervision of the materials, tools, and equipment for the contractor’s employees to provide the contracted services;
- Taxes – the independent contractor should be responsible for its own taxes and the proper withholding taxes for its own employees;
- Worker’s Compensation – the independent contract should be responsible for maintaining worker’s compensation insurance for its employees, not the agricultural operation that is purchasing the contractor’s services;
- Statement of independent status – clearly identify that the contractor is an independent contractor that operates independently of the agricultural operation that is purchasing/contracting for its services;
- Statement of inability to bind the purchaser of services – neither the contractor nor the agricultural operation should have the authority to bind the other to any transaction or contract with a third-party or otherwise act on the behalf of or in any way represent the other;
- Obligation to comply with applicable federal, state and local laws – the contractor should be obligated to comply with all applicable laws and regulations for the life of the contract and, upon request, should produce evidence of such compliance to the agricultural operation upon request;
- Indemnification – require the independent contractor to hold the agricultural operation and its employees, directors, officers, affiliates, successors, and assigns harmless from and against all claims, liabilities, actions, losses, damages and expenses caused by the acts of the contractor or its failure to comply with the applicable laws and regulations; and
- Breach – upon the independent contractor’s failure to comply with the provisions of the contract, the agricultural operation may terminate the contract.
Action Items: Pork producers should carefully evaluate relationships with service providers to determine whether they are truly independent contractors or may be employees. And when using independent contractors, pork producers should use written contracts to carefully define the relationship and each party’s duties.
This information is general in nature and should not be construed as tax or legal advice.