Independent Contractor Agreements in Nevada
It is essential that you and your business properly classify independent contractors and that you have detailed, written agreements with your independent contractors. Improper classification of workers can be very costly and time consuming for your business.
In order to ensure you are correctly classifying your workers, there are 3 different guidelines: Nevada law; Federal law, and the IRS guidelines. Remember, simply having an agreement in writing does not guarantee someone is actually lawfully an independent contractor.
What is the difference between an independent contractor and an employee?
An independent contractor is defined in Nevada law NRS 616A.255 as:
Any person who renders service for a specified recompense for a specified result, under the control of the person's principal as to the result of the person's work only and not as to the means by which such result is accomplished.
Conversely, an employee is defined in NRS 608.010. “Employee” includes both male and female persons in the service of an employer under any appointment or contract of hire or apprenticeship, express or implied, oral or written, whether lawfully or unlawfully employed.
More guidance is provided in NRS 608.0155, which describes persons presumed to be independent contractors. It states:
1. For the purposes of this chapter, a person is conclusively presumed to be an independent contractor if:
(a) Unless the person is a foreign national who is legally present in the United States, the person possesses or has applied for an employer identification number or social security number or has filed an income tax return for a business or earnings from self-employment with the Internal Revenue Service in the previous year;
(b) The person is required by the contract with the principal to hold any necessary state business registration or local business license and to maintain any necessary occupational license, insurance or bonding; and
(c) The person satisfies three or more of the following criteria:
(1) Notwithstanding the exercise of any control necessary to comply with any statutory, regulatory or contractual obligations, the person has control and discretion over the means and manner of the performance of any work and the result of the work, rather than the means or manner by which the work is performed, is the primary element bargained for by the principal in the contract.
(2) Except for an agreement with the principal relating to the completion schedule, range of work hours or, if the work contracted for is entertainment, the time such entertainment is to be presented, the person has control over the time the work is performed.
(3) The person is not required to work exclusively for one principal unless:
(I) A law, regulation or ordinance prohibits the person from providing services to more than one principal; or
(II) The person has entered into a written contract to provide services to only one principal for a limited period.
(4) The person is free to hire employees to assist with the work.
(5) The person contributes a substantial investment of capital in the business of the person, including, without limitation, the:
(I) Purchase or lease of ordinary tools, material and equipment regardless of source;
(II) Obtaining of a license or other permission from the principal to access any work space of the principal to perform the work for which the person was engaged; and
(III) Lease of any work space from the principal required to perform the work for which the person was engaged. The determination of whether an investment of capital is substantial for the purpose of this subparagraph must be made on the basis of the amount of income the person receives, the equipment commonly used and the expenses commonly incurred in the trade or profession in which the person engages.
2. The fact that a person is not conclusively presumed to be an independent contractor for failure to satisfy three or more of the criteria set forth in paragraph (c) of subsection 1 does not automatically create a presumption that the person is an employee.
3. As used in this section, “foreign national” has the meaning ascribed to it in NRS 294A.325.
The IRS examines the following to determine if the worker is an employee or an independent contractor.This is called the 11 factor test.
A. Behavioral control
Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of:
1 Instructions the business gives the worker. An employee is generally subject to the business' instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work:
a When and where to do the work
b What tools or equipment to use
c What workers to hire or to assist with the work
d Where to purchase supplies and services
e What work must be performed by a specified individual
f What order or sequence to follow
The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker's performance or instead has given up that right.
2 Training the business gives the worker. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.
B. Financial control
Facts that show whether the business has a right to control the business aspects of the worker's job include:
3 The extent to which the worker has unreimbursed business expenses. Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services they perform for their business.
4 The extent of the worker's investment. An employee usually has no investment in the work other than his or her own time. An independent contractor often has a significant investment in the facilities he or she uses in performing services for someone else. However, a significant investment is not necessary for independent contractor status.
5 The extent to which the worker makes services available to the relevant market. An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.
6 How the business pays the worker. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.
7 The extent to which the worker can realize a profit or loss. Since an employer usually provides employees a workplace, tools, materials, equipment, and supplies needed for the work, and generally pays the costs of doing business, employees do not have an opportunity to make a profit or loss. An independent contractor can make a profit or loss.
C. Type of relationship
Facts that show the parties' type of relationship include:
8 Written contracts describing the relationship the parties intended to create. This is probably the least important of the criteria, since what really matters is the nature of the underlying work relationship, not what the parties choose to call it. However, in close cases, the written contract can make a difference.
9 Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay. The power to grant benefits carries with it the power to take them away, which is a power generally exercised by employers over employees. A true independent contractor will finance his or her own benefits out of the overall profits of the enterprise.
10 The permanency of the relationship. If the company engages a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship.
11 The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of the company's regular business activity, it is more likely that the company will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney's work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.
There is a safe harbor provision in Section 530(a) of the Revenue Act of 1978 that sometimes allows companies to classify workers in close cases as independent contractors, even if they might be considered employees under the IRS eleven-factor.However, the classification must be consistent with the industry practice for such workers, and/or a previous IRS audit has found that such workers are not employees, and/or an IRS ruling or opinion letter supports the classification in question, and the worker has been treated all along as an independent contractor.
A number of “economic realities” factors are helpful guides in resolving whether a worker is truly in business for himself or herself, or like most, is economically dependent on an employer who can require (or allow) employees to work and who can prevent employees from working. The Supreme Court has indicated that there is no single rule or test for determining whether an individual is an employee or independent contractor for purposes of the FLSA. The Court has held that the totality of the working relationship is determinative, meaning that all facts relevant to the relationship between the worker and the employer must be considered.
While the factors considered can vary, and while no one set of factors is exclusive, the following factors are generally considered when determining whether an employment relationship exists under the FLSA (i.e., whether a worker is an employee, as opposed to an independent contractor):
- The extent to which the work performed is an integral part of the employer's business. If the work performed by a worker is integral to the employer's business, it is more likely that the worker is economically dependent on the employer and less likely that the worker is in business for himself or herself. For example, work is integral to the employer's business if it is a part of its production process or if it is a service that the employer is in business to provide.
- Whether the worker's managerial skills affect his or her opportunity for profit and loss. Managerial skill may be indicated by the hiring and supervision of workers or by investment in equipment. Analysis of this factor should focus on whether the worker exercises managerial skills and, if so, whether those skills affect that worker's opportunity for both profit and loss.
- The relative investments in facilities and equipment by the worker and the employer. The worker must make some investment compared to the employer's investment (and bear some risk for a loss) in order for there to be an indication that he/she is an independent contractor in business for himself or herself. A worker's investment in tools and equipment to perform the work does not necessarily indicate independent contractor status, because such tools and equipment may simply be required to perform the work for the employer. If a worker's business investment compares favorably enough to the employer's that they appear to be sharing risk of loss, this factor indicates that the worker may be an independent contractor.
- The worker's skill and initiative. Both employees and independent contractors may be skilled workers. To indicate possible independent contractor status, the worker's skills should demonstrate that he or she exercises independent business judgment. Further, the fact that a worker is in open market competition with others would suggest independent contractor status. For example, specialized skills possessed by carpenters, construction workers, and electricians are not themselves indicative of independent contractor status; rather, it is whether these workers take initiative to operate as independent businesses, as opposed to being economically dependent, that suggests independent contractor status.
- The permanency of the worker's relationship with the employer. Permanency or indefiniteness in the worker's relationship with the employer suggests that the worker is an employee, as opposed to an independent contractor. However, a worker's lack of a permanent relationship with the employer does not necessarily suggest independent contractor status because the impermanent relationship may be due to industry-specific factors, or the fact that an employer routinely uses staffing agencies.
- The nature and degree of control by the employer. Analysis of this factor includes who sets pay amounts and work hours and who determines how the work is performed, as well as whether the worker is free to work for others and hire helpers. An independent contractor generally works free from control by the employer (or anyone else, including the employer's clients). This is a complex factor that warrants careful review because both employees and independent contractors can have work situations that include minimal control by the employer. However, this factor does not hold any greater weight than the other factors. For example, a worker's control of his or her own work hours is not necessarily indicative of independent contractor status; instead, the worker must control meaningful aspects of the working relationship. Further, the mere fact that a worker works from home or offsite is not indicative of independent contractor status because the employer may exercise substantial control over the working relationship even if it exercises less day-to-day control over the employee's work at the remote worksite.
Factors which are immaterial to determining whether a worker is an independent contractor or an employee.
There are certain factors which are immaterial in determining the existence of an employment relationship.
- The fact that the worker has signed an agreement stating that he or she is an independent contractor is not controlling;
- What the worker and owner have agreed to label the worker;
- The fact that the worker has incorporated a business and/or is licensed by a State/local government agency has little bearing on determining the existence of an employment relationship.
- The United States Supreme Court has held that employee status is not determined by the time or mode of pay.
Why does classification matter?
Only employees are afforded protections such as minimum wage, freedom from discrimination,
Interesting Decisions about Independent Contractors
One of the more famous decisions about the treatment of workers is Terry v. Sapphire,
In Sapphire, a number of performers sued Sapphire Gentlemen's Club, claiming they were unfairly classified as independent contractors. The Nevada Supreme Court employed the federal economic realities test and concluded that Sapphire was an employer under the totality of the circumstances and therefore the performers were entitled to minimum wage.
Sapphire Gentlemen's Club contracts for semi-nude entertainment with approximately 6,600 performers. Under these contracts, the performers may determine their own schedules (but agree to work a minimum shift length of six hours any day they decide to work unless they advise a Sapphire employee of their early clock-out); set prices for their private performances (provided that they comply with the club's established minimum charge); control the "artistic aspects" of their performances (though the club D.J. chooses the music they dance to, and they must obey club rules as to body positioning and physical contact with customers); and perform at other venues should they wish to. The performers also agree to abide by certain "house rules," including a minimum standard of coverage by their costumes and a minimum heel height; payment of a "house fee," which ranges in amount, any night they work; and performing two dances per shift on the club stage unless they pay an "off-stage" fee.
Sapphire paid no wages to the performers. Their income was solely dependent upon tips and dancing fees paid by Sapphire patrons.
Interestingly, in responding to the economic realities test, Sapphire claimed the dancers were not an integral part of their business. The Court was not persuaded by this argument and noted that Sapphire advertises itself as the “World's Largest Strip Club.”
Other performers in different jurisdictions have also sued gentlemen's clubs arguing that they are employees. An article dated February 20, 2017 notes that a federal judge has given preliminary approval for a $6.5 million settlement in lawsuits against 64 of the 132 strip clubs owned by Déjà Vu Consulting Inc. nationwide. https://lasvegassun.com/news/2017/feb/20/strippers-wages-benefits-labor-lawsuits/