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Employee vs. Independent Contractor: Legal Distinctions Every Business Should Understand

The rise of the “gig economy” has led to a substantial increase in the number of Nevada workers classified as independent contractors as opposed to traditional employees. From an employer’s standpoint, using independent contractors offers many potential benefits. The employer does not have to withhold or pay any employment taxes for contractors. And independent contractors are not entitled to any of the legal benefits associated with employees, such as unemployment and workers’ compensation insurance.

Unfortunately, because of these perceived benefits, many Nevada businesses are quick to misclassify employees as independent contractors. This violates both Nevada and federal employment laws. If you are a worker who believes they have been misclassified, you have the right to take legal action against your employer. In addition, the employer may face government fines and additional sanctions.

With all that in mind, what are the legal distinctions between an “employee” and an “independent contractor.” State and federal law offer somewhat differing answers. Here is a basic overview.

Federal Definitions

The Internal Revenue Service, which is responsible for collecting employment taxes, applies what is known as the “common law rule” when it comes to classifying a worker. This rule looks at the three categories–behavioral control, financial control, and the relationship of the parties–when deciding if a worker is properly classified. To briefly explain each category:

  • behavioral control refers to whether or not the business directs and controls how the work is performed by the worker.
  • financial control refers to whether or not–and to what extent–the business directs and controls the financial and business aspects of the worker’s job.
  • the relationship of the parties looks at any contractual agreements defining the working relationship and the extent to which the services provided by the worker are part of the company’s regular business.

Meanwhile, the U.S. Department of Labor, which enforces federal statutes such as the Fair Labor Standards Act, has cited guidance from the U.S. Supreme Court, which has held there is “no single rule of test” for classifying workers. Instead, courts must look at many factors specific to a given case. These factors largely mirror the common law rule enforced by the IRS.

Nevada Definitions

The State of Nevada goes further than the common law rule and imposes a statutory “presumption” that a worker is an independent contractor when certain conditions are met. Specifically, NRS 608.0155 states that “a person is conclusively presumed to be an independent contractor if”:

  • They possess or apply for an employer identification number or Social Security number and file an income tax return for a business or earnings from self-employment during the previous tax year. (This condition does not apply to foreign nationals who are legally present in the United States.)
  • They are required by contract with the business they perform work for to hold any required state and local business licenses, as well as any occupational licenses, insurance, or bonding that may be required for their occupation.

Assuming a worker meets these first two requirements, they must then satisfy at least 3 of the following 5 conditions:

  1. The worker has control and discretion over the means and manner they perform their work. Their primary element of the contact between the worker and business is therefore for the result of the work and not how it is performed. The business may still retain any control necessary, however, to comply with other regulatory or contractual obligations.
  2. The worker has control over the time the work is performed, except where the agreement is related to providing entertainment, in which cases the business may specify when said entertainment must be performed. A business and worker can also agree to a specific completion schedule and range of work hours.
  3. The worker is not required to work exclusively for the business, except where required by law or whether the parties agree the worker will exclusively provide services to the business for a limited period.
  4. The worker is free to hire their employee to assist with the work.
  5. The worker contributes a substantial investment of capital in their business, including the purchase or leasing of tools, materials, and equipment; obtaining licenses from parties other than the contracting business; or leasing any workspace from the business to perform the contracted work.

Speak with a Las Vegas Employment Attorney Today

Worker misclassification can cost employees thousands of dollars in pay and benefits. So if you have been the victim of possible misclassification, you need to speak with an experienced Las Vegas employment attorney as soon as possible. Call Ace Law Group today at (702) 333-4223 or contact us online to schedule a free initial consultation.