How Florida Defines Independent Contractors
Defining Independent Contractors Under Florida Law
In order to correctly identify an independent contractor in Florida, the definition of an employee must be examined. The Florida Statutes include an official criteria regarding independent contractors and employees. Under Florida Statute 440.02(15), an employee is defined as "any natural person who performs services for another under the control or direction of the other person as to the results of the work and the details of accomplishing it." In other words, employees depend on their employer, while an independent contractor operates under their own means and usually without the supervision of an employer.
Another source that defines an employee, under Florida law, is the Florida Unemployment Compensation Law. Section 443.036(21) of the Florida Statutes states that an employee is "any individual who, for the employer, performs services in this state . " The same section of the Florida Statutes goes on to list exemptions to the definition of "employee," including individuals who operate their own business or practice of profession and are paid without any deduction for Social Security, unemployment insurance, Medicare, or other taxes typically withheld by an employer. Customers not being required to pay workers’ compensation would be another sign that the worker is an independent contractor and not an employee.
The Florida Department of Revenue (DOR) defines an independent contractor as "a person or business (individual or entity) that performs services for a business entity (individual or entity) based on an agreement, usually contract." The same DOR document includes the following chart which outlines the differences between employees and independent contractors:
According to the Florida Department of Revenue, an independent contractor can be identified more easily when he or she meets the following criteria:
Conversely, the following creates an assumption of an employee relationship, according to the Florida DOR:
Engaging Independent Contractors in Florida
Hiring independent contractors in Florida is more than simply issuing a 1099 form at the end of the year. As the number of businesses engaging independent contractors in Florida increase, it is imperative for companies to understand the requirements and procedures to follow for properly hiring independent contractors in Florida.
The first step is to review the established legal definitions of independent contractor. Understanding the difference between an employee and an independent contractor is the first step in retaining independent contractors in Florida.
Florida Abides by the IRS Definition: Florida law, like federal law, abides by The Internal Revenue Service (IRS) common law rules of determining the status of a worker. The IRS has established three categories of criteria for determining independent contractor status:
The IRS has continued to emphasize the importance of the "method" or "means" by which an individual does the work as the most important factor in determining independent contractor status, regardless of the business type or industry.
Written Contract: Having a written contract is important for a variety of reasons. Foremost, it defines the relationship between you and the independent contractor, clarifies the terms of employment, and highlights the method in which compensation is paid. When seeking to protect themselves from issues, employers are encouraged to include the following in their contracts:
Other documentation helpful in protecting employers includes but is not limited to:
Beyond these legal documents, employers should keep an open line of communication with the independent contractor; make sure the contractor feels free to come to you with questions or concerns. When there is a problem, or there has been a miscommunication, do not wait until an issue arises to try to contact the independent contractor. Maintain good working relationships and communication from the beginning, so you can avoid any problems relating to improper termination later down the line.
Florida’s Independent Contractor Test
Florida has established various tests for determining independent contractor status under state law. Generally speaking, Florida uses the IRS 20-Factor Test to determine independent contractor status.
Under Florida’s 20-factor test, the primary consideration is whether the employer has the right to control and direct the means of production. A secondary consideration under the IRS test is whether the employer and the workers perceive themselves to be joint ventures.
The factors include:
- (1) Instructions- are given to the workers as to when, where, and how something is to be done.
- (2) Training- provided to the workers.
- (3) Integration- integrating the worker’s services into the business operations.
- (4) Services Rendered- must be an important aspect of the business.
- (5) Services Rendered- rendering of services by a uniformed workforce working in a sequential order.
- (6) Services Rendered- skills require use of workers without special skills.
- (7) Investment- of a substantial part of the capital.
- (8) Not realizing a profit or loss if the services are terminated.
- (9) Work for the business beyond the current year.
- (10) Services Rendered- permanency of the working relationship.
- (11) High degree of control over the worker.
- (12) Services Rendered- control over hiring, supervising, and paying workers.
- (13) Services Rendered- ability to discharge workers with or without cause.
- (14) Services Rendered- have the functional characteristics they will have after dismissal.
- (15) Services Rendered- engaging in the same activities outsiders do.
- (16) Services Rendered- controlling the worker’s hours.
- (17) Services Rendered- payment is based on the time an employee works.
- (18) Services Rendered- tools, textbooks, instruments, materials, etc. supplied by the employer.
- (19) Services Rendered- direct supervision of workers.
- (20) Services Rendered- use of exclusive work-places or equipment.
Entitlements and Obligations of Florida Independent Contractors
For many employees, classification as an independent contractor is perceived as a means of increasing earnings through reduced taxes and fewer employer mandated expenses for items such as health insurance. But, as they say in poker, read the fine print when you get the imperative to "call". The Social Security Administration has determined that independent contractors are responsible for paying both halves of the Federal Insurance Contribution Act (FICA) which provides payments to persons when they attain retirement age. The IRS considers independent contractors "self-employed" persons who must pay self-employment tax which includes both the employer and employee Social Security taxes. The net is that as an independent contractor one pays double the amount of Social Security taxes to the federal government and must file a Schedule C Self-Employment Tax computation with their Form 1040 income tax return. Additionally, Florida independent contractors are not entitled to unemployment compensation or other employment benefits which are generally offered and mandated solely by employers, such as: group health insurance, paid sick days, and vacation time. Making matters even worse for independent contractors is that they are required to make income tax estimated quarterly payments which are the same as corporations and self-employed individuals. Thus, the tax burden on an independent contractor can be significant.
Most importantly, independent contractors in Florida are not covered by worker’s compensation. Taking the good and bad with the bad, a Florida independent contractor is not eligible for payment of workers’ compensation benefits from his putative employer. While the trade-off may exist that workers’ compensation coverage in most instances mandates the employer’s liability for medical benefits and wage loss payments, independent contractors are exposed to personal claims for negligence actions arising out of personal injuries suffered on the job. Likewise, negligent actions performed by an independent contractor may expose him to liability for the damages sustained by others as a result of those actions. If the independent contractor is a business entity, a corporate veil challenge or piercing may expose the independent contractor’s principles (generally the shareholders or members) to personal liability. If the independent contractor is an individual and is sued by employees or other claimants, the independent contractor’s personal assets may be at risk of loss as a result of a judgment.
Misclassifying Independent Contractors in Florida
The consequences of misclassifying employees as independent contractors can be substantial in Florida. Both the IRS and the state Department of Revenue impose penalties and fines, and misclassification can even result in criminal charges against an employer.
All employers and independent contractors must be familiar with the consequences of misclassification to avoid them. The most immediate consequence is the requirement to pay back taxes. Employers owe social security, federal unemployment, income tax withholding, and disability insurance contributions. Employers must also pay interest and a penalty (penalty determined by the amount owed). Minimum liability for underpayment of unemployment tax is $25 per employee.
Additionally, it is common for the IRS to assess additional employment taxes even if an employer is not liable for workers’ compensation or unemployment compensation tax. The IRS can assess employment taxes even if the independent contractor wanted the company to classify him/her as such.
Significant payments to employees can result in an IRS audit of the employer’s other workers, which results in the employer being liable for employment taxes for all employees . An audit of one employee can result in an audit of all employees.
Furthermore, each state has its own penalties for unemployment compensation tax for misclassification. Still more serious is the potential for criminal penalties. If an employer willfully classifies employees as independent contractors, the employer can face criminal prosecution. Florida treats violations of state law as criminal misdemeanors or felonies.
Also, civil damages are available to subcontractors, independent contractors, and employees who are injured by the misclassification. They may sue to recover unpaid wages, commissions, and other compensation and benefits that would have been owed but for the original designation. The employer who misclassifies independent contractors as employees may be liable for substantial damages, which include interest. Courts also tend to interpret state wage and hour laws broadly against employers.
There is a myriad of potential consequences for misclassifying employees as independent contractors in Florida. Companies who wish to avoid them should seek the advice of experienced attorneys in developing, creating, and enforcing their independent contractor agreements.
Updates to Florida Independent Contractor Laws
In recent years, there have been developments in case law and legislative activity that affect Florida independent contractor laws. The Court has significantly expanded the situations in which a worker will be considered a common law employee rather than an independent contractor. In Rowan Companies, Inc. v. Tetra Technologies, Inc., 992 So. 2d 141 (Fla. 2008), the Florida Supreme Court examined the standard that should be used to determine whether the relationship between a worker and a purported employer is that of an employer/employee or independent contractor when determining whether the worker is an employee for purposes of Florida’s Workers’ Compensation Law. In Tetra Technologies, the Court held that the "right to control" test should be applied instead of the "economic realities" test used by the lower courts. The Court elaborated, stating, "[t]he right-to-control test considers ‘not only whether the putative employer had the right to control the details of the work, but also whether it had the right to direct the manner in which the job was to be done.’" A worker/contractor relationship exists only if the employer retains the "right of control" over the work. In the wake of Rowan, workers have had some success in avoiding the independent contractor label and claiming worker’s compensation.
Additionally, in the 2012 legislative session, the Florida legislature amended the unemployment compensation tax laws to exclude from employment individuals deemed to be independent contractors. More specifically:
(a) An "independent contractor" is any individual or entity performing services for remuneration for a principal pursuant to a written agreement between them if the individual or entity is free from the direction and control of the principal in connection with the performance of the service and if the service is outside of the usual course of business for which the services are performed.
(b) For purposes of this subsection, the term "principal" includes any person performing for remuneration or an employee of such person. The term "principal" does not include an individual performing services as an employee. The terms "individual" and "entity" may include an organization, corporation, partnership, sole proprietorship, trust, or estate, but do not include a corporation, partnership, trust, or estate that would be an individual or entity but for the fact that the individual is dead or incapacitated.
(c) This subsection does not apply to situations in which an employment relationship arises without the existence of a written agreement between the principal and the individual or entity performing the services; rather, it applies only to circumstances in which there is a written agreement to perform services.
(d) This definition shall be liberally construed so as to enable this state to participate in any federal unemployment tax program while still being as equal as possible to the surrounding states with regard to state unemployment tax.
It remains to be seen what affect the revised unemployment compensation tax laws will have on employers and independent contractors.
Florida Independent Contractor Resources
Florida Department of Economic Opportunity
The Florida Department of Economic Opportunity assists businesses and communities as they pursue economic development and workforce opportunities in the state.
Florida Agency for Workforce Innovation
FAWI is a part of the DEO that offers information on incentives, programs, and opportunities for employment.
Florida Bar, Labor & Employment Law Section
The Labor & Employment Law Section provides up-to-date information on employment law and the areas of workers’ compensation.
U.S. Department of Labor , Wage and Hour Division
Find out more on wage standards and protections, exemptions, child labor laws, and misclassification.
Florida Office of Financial Regulation
Provides information on new rules, laws, qualifying for licensing, and updates on financial regulations.
American Bar Association Consumer Insights
A blog and resource center for consumer issues.
National Association for the Self Employed
An organization dedicated to advocating for the self-employed, NASE provides training, networking, and resources.
