William T. Wilson, Esquire

Pennsylvania courts emphasize that the right of control is the hallmark of employee status

What makes a worker an "employee" or an "independent contractor?" And what are the relative benefits of each type of designation to both employee and employer? How to define the relationship between a person who provides services to another who pays for those services is an issue that frequently arises in employment law, and the decision of which designation to apply can have significant legal consequences for both parties.

Issues of Liability
The recipient of the services often has incentives to characterize the relationship as one of an independent contractor rather than an employee in order to avoid certain types of liability, specifically: liability for withholding or other taxes, liability to third parties for the acts of the service provider, or liability to the person providing services. Some, although not all, of the state and federal statutory remedies for misconduct in the workplace are available only to persons who enjoy the status of an employee. An erroneous decision to treat large groups of persons as independent contractors can have serious repercussions for the company that is ultimately found to have been their employer. In a recent case against Microsoft, the employer was required to admit a large number of persons as employees under its employee stock purchase plan.

Usually it is the worker who wants to establish employee status, but occasionally the tables are turned. For example, in personal injury law a defendant can limit his or her liability to that provided by the Workers' Compensation Act if the plaintiff is its employee. An entire body of law has developed on this question under that statute.

Control is the Determinative Factor
in Testing Employee Status
Depending on the specific legal question involved, there may be subtle differences in the test for employee status. (The Internal Revenue Code test applied in the Microsoft case mentioned above is somewhat different than the Pennsylvania Unemployment Compensation Act test.)

Regardless of the specific articulation of the test, the outcome is almost invariably determined by the amount of control over how the worker performs his job. In Nationwide Mutual Ins. Co. vs. Darden, the United States Supreme Court emphasized the importance of defining "employee" under the Employee Retirement Income Security Act. If the worker is responsible only for the final result of the work, and is otherwise not treated as an employee, then the worker is likely to be an independent contractor. However, if the hours of work, equipment used, or the methods of performance are closely controlled by the purchaser of services, an employment relationship is present.

The Pennsylvania Supreme Court enumerated a series of relevant employee status factors in Hammermill Paper Co. vs. Rust Engineering Co., including:

1. Control of the manner in which work is to be done;
2. Responsibility for result only;
3. The terms of the agreement between the parties;
4. The nature of the work or occupation;
5. The skill required for performance;
6. Whether one is engaged in a distinct occupation or business;
7. Which party supplies the tools or equipment;
8. Whether payment is by time or by the job;
9. Whether work is part of the regular business of the putative employer; and,
10. The right to terminate the employment at any time.

Other courts in Pennsylvania have followed this test and occasionally stated that no one factor is ultimately determinative. Nevertheless, courts in Pennsylvania are quick to emphasize that, of all determining factors, the right of control is the hallmark of employee status.

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