October 24, 2018

If a small business hires an attorney to do work, can the attorney be treated as an “employee” rather than an “independent contractor?” Most people would answer “independent contractor,” without any hesitation, but the outcome isn’t always so clear-cut. In fact, the employment status of one attorney was called into question in one case decided by a New York appeals court, even though the attorney operated his own law firm.

Basic premise: It obviously costs more for a business to use employees rather than independent contractors. For starters, a business owes employment taxes on wages paid to employees, while amounts paid to independent contractors aren’t subject to those taxes. Employers might have to provide expensive health insurance and retirement plan benefits to employees, such as matching 401(k) plan contributions, as well as other fringe benefits. Finally, the business may have to pay additional unemployment insurance for employees under state law.

The determination of whether a worker is an employee or independent contractor for these purposes generally depends on the level of control exerted by the employer. In one case, an attorney who worked extensively for a business association was initially branded as an employee. (Empire State Towing and Recovery Association, Inc. v. Commissioner of Labor, NY Ct. of Appeals, No. 160, 10/26/10)

Facts of the case: Peter O’Connell maintained a law practice in Albany, New York, specializing in government relations and lobbying. The Empire State Towing and Recovery Association, a group representing towing firms, hired O’Connell for his legal and lobbying services. In 1997, Empire State Towing and O’Connell entered into a written agreement in which the attorney would also perform administrative services as the association’s executive director.

Pursuant to this agreement, O’Connell maintained a telephone and computer database in the name of the association, mailed out dues and membership materials, mailed periodic financial statements to board members, coordinated publication of a journal and attended board meetings.

O’Connell also maintained a bank account and had check-writing authority up to a $500 limit. For higher amounts, he had to submit documentation and obtain the signature of the association’s treasurer. O’Connell performed all these services from his own law office. He was free to set his own schedule and did not work exclusively for the association. In 2004, the association hired a part-time assistant to help O’Connell in his duties as executive director. Empire State Towing conceded that this part-time assistant was an employee of the association. O’Connell quit the job as executive director in 2006.

An audit by the New York Department of Labor (DOL) determined that O’Connell was an employee of Empire State Towing during this time period and resulted in assessments for additional unemployment insurance. The association disputed that finding and argued that O’Connell was an independent contractor. But an administrative law judge sustained the determination based on evidence showing the level of control exercised by Empire State Towing over O’Connell’s duties as executive director.

An appeal to the Unemployment Insurance Appeal Board affirmed the ruling. The Appeal Board found that there was “credible evidence” that the employer “exercised or reserved the right to exercise sufficient supervision, direction, and/or control to establish an employer-employee relationship.”

Subsequently, Empire State Towing filed a notice of appeal with the Appellate Division. The Appellate Division affirmed the prior determination on the grounds that the Appeal Board’s decision was based on substantial evidence. It referred to the facts that the association furnished office space and equipment to O’Connell, reimbursed him for his expenses and required the attorney to submit reports and attend meetings.

But that’s when the tide turned. On appeal, the court ruled that O’Connell was not an employee. Reasons: He did mailings out of his own office, set his own hours and didn’t work exclusively for the association. He could sign checks, but had to obtain another signature for amounts over $500. Most important, as it relates to overall control of the worker, there was no evidence that the association controlled every aspect of O’Connell’s work. The appeals court also noted that, as an attorney, O’Connell was a professional subject to special ethical rules and responsibilities under state law.

Bottom line: O’Connell should be treated as an independent contractor.

Be mindful that each case is decided on its own merits. If you’re unsure about the determination of employment status, consult with your tax adviser.

© 2018