This FAQ is dedicated to questions about independent contractors. Select a link below or scroll down to see the responses to each question on the list.
Q1: How can our ministry identify an independent contractor for tax purposes?
Q2: How Might Our Ministry Be Liable For the Acts of an Independent Contractor?
Q3: Could our ministry owe taxes or workers' compensation benefits in connection with independent contractors?
Q4: Does our ministry's workers' compensation policy cover independent contractors?
A: The IRS says that ministries need to evaluate these three categories when determining whether a worker is an independent contractor or an employee:
Evaluate these categories with the help of a locally licensed attorney. It’s essential that you make the proper determination. As the IRS states on its website, “The IRS is not required to follow a contract stating that the worker is an independent contractor, responsible for paying his or her own self-employment tax. How the parties work together determines whether the worker is an employee or an independent contractor.”
If you still have trouble classifying a worker after consulting with an attorney, you can take the case to the IRS. Fill out and submit IRS Form SS-8 to ask for a ruling on the worker’s status. Be aware, however, that this ruling applies for tax purposes only and not necessarily for liability or workers’ compensation purposes.
A: Your ministry is responsible for the actions of any person or organization to which it delegates authority.
When a ministry hires an independent contractor or an “agent,”—someone to perform work on behalf of the ministry—the ministry may be held liable for certain acts of its agent that cause harm to others.
Generally, agency liability refers to the legal responsibility that an organization, known as the principal, may have for the harmful actions of an agent, such as an independent contractor. Agency liability requirements include everything from the creation of the relationship, consent between the principal and agent, and overall oversight.
This form of liability is typically limited: it is only recognized under specific conditions in many jurisdictions, making it a less frequent basis for legal claims by plaintiffs. While the potential liabilities an organization may face are typically more significant in an employer-employee relationship, it’s important to note that courts have attributed liability to organizations for the actions of the independent contractors that they selected or decided to retain.
Negligent selection & negligent retention
Ministries are more likely to face liability for negligent selection of a particular contractor. Generally, negligent selection shifts the focus from the actions of the contractor to the organization itself due to the organization’s lack of due diligence in the selection process. Ministries could be accused of not properly checking the credentials, skill level, or competence of contractors prior to retaining their services.
When successful, negligent selection bypasses the agency liability requirements by holding the ministry responsible only for its decision to hire the contractor rather than for the specific acts of the contractor.
A final legal principle is negligent retention, which deals with what happens after an independent contractor has been hired and is already working for the organization. Negligent retention arises when an organization knew, or should have known, that an independent contractor was unqualified or unfit for the task at hand when the action in question occurred. When successful, it holds the organization responsible for retaining an independent contractor despite being aware of their potential risk or hazard.
Here’s a quick way to remember the difference: Negligent selection pertains to the actions taken before engaging an independent contractor (the selection process), while negligent retention focuses on the actions after the contractor has been hired (contractor retention). Both concepts address an employer’s duty to safeguard against harm caused by their employees.
Although negligent selection and retention will likely come into play for situations involving employees, it is important to make sure that you correctly classify workers as either an employee or independent contractor. This classification not only impacts the legal responsibilities and liabilities of the organization but also influences the strategies for mitigating potential risks and hazards. Therefore, a thorough understanding of these concepts is crucial for any organization engaging the services of independent contractors or employees.
A: The simple answer: “it’s possible.”
Determining a ministry’s liability in relation to the work of independent contractors involves navigating three key legal categories:
1. Tax Requirements
For tax purposes, the Internal Revenue Service (IRS) primarily uses the Common Law Test to distinguish between independent contractors and employees. This test involves analyzing the following three factors:
While state revenue agencies often follow IRS guidelines, some states use their own tests to determine worker classification for state tax purposes, which can differ from the IRS criteria. The IRS distinction applies to every worker—from the handyman who performs routine maintenance, to the administrative assistant who folds bulletins and supports the church staff, to a teenager who mows the lawn. Failing to properly determine an individual’s worker status can result in significant penalties at both the state and federal levels.
2. Employee or Independent Contractor Status
Liability for negligence and other wrongful acts often depends on whether the individual who caused the harm was an employee or an independent contractor. Often, courts make this distinction based on prior case law and state statutes. A ministry could be held responsible for misclassifying a worker as an independent contractor when the worker was actually an employee.
Also, a ministry could be found liable for negligently selecting a particular contractor or for providing faulty equipment for the contractor’s use, even if the relationship between the ministry and the worker is truly an independent contractor arrangement.
3. Workers’ Compensation Requirements
State workers’ compensation laws vary and often apply different tests to determine whether a worker should be classified as an employee eligible for benefits. Even if your ministry classified the worker as an independent contractor, some states might apply their specific tests to conclude that the worker should be considered an employee.
For instance, some states use the “ABC test,” which presumes a worker is an employee unless the hiring entity can prove that:
Other states might use variations of the “common law test” or “economic realities test” to make this determination. Therefore, it’s important for your ministry to understand the specific criteria used in your state to classify workers correctly and ensure compliance.
For example, if a plumber is subcontracted to work on a building project for the ministry and neither the subcontractor nor the general contractor has workers’ compensation insurance that covers the plumber, the state will likely apply the ministry’s workers’ compensation policy to the plumber for any injuries he sustains on the ministry’s job site.
In the absence of any other coverage, it’s also possible that the ministry’s workers’ compensation policy would cover teenagers providing lawn care for hire or maintenance workers employed on an as-needed basis.
Determining Worker Status
The determination of independent contractor status is not always easy and may not absolve the ministry from all liability. It’s always best to and obtain a legal opinion from a locally licensed attorney when evaluating a worker’s status.
The IRS does allow organizations to file an SS-8 Form, which requests the agency to make a determination of the status of a worker for the purposes of federal employment taxes and income tax withholding. This form should not be utilized for determining whether a worker should have workers’ compensation insurance or be classified as an employee in accordance with the federal Fair Labor Standards Act (FLSA). The FLSA has its own set of standards that ministries should consider for employment purposes.
The FLSA is primarily concerned with minimum wage, overtime pay, recordkeeping, and child labor standards. While the FLSA does address worker classification to some extent, it is less directly relevant to the specific question of whether a ministry could owe taxes or workers' compensation benefits in connection with independent contractors.
A: Generally speaking, a truly “independent” contractor will not be covered by your ministry’s workers’ compensation policy. However, consider the following case from Tennessee:
Independent Contractor or Employee? A Tennessee Court Decides
A church member who also served on the planning committee volunteered his time working on a building project for the church. When church leaders became concerned about the amount of time being donated by the church member, they decided to pay for the hours that the individual worked. The only control the church exerted over this individual was direction over the work actually being done, control of who worked on the job site, and a reservation of the right to terminate the working relationship at any time. After the worker fell from the roof and died from the injuries, the Tennessee courts determined that the man was an “employee” for purposes of workers’ compensation coverage.
Independent Contractor or Employee?
The rule followed by the Tennessee court in reaching this conclusion is similar to those used by courts in other states:
“Because the Workers’ Compensation Law must be rationally but liberally construed to promote and adhere to the Act’s purpose of securing benefits to those workers who fall within its coverage, this Court will resolve doubts in favor of a finding that a worker is an employee rather than an independent contractor.” Blake v. Auto-Owners Insurance Company, Case No. W2005-01545-WC-R3-CV (Tenn. 2007).
Some states allow coverage for independent contractors by means of a special policy endorsement—a modification to an existing insurance policy. Some states require independent contractors to register with the state and then assume that all unregistered workers are employees. For construction projects, some states apply coverage under the prime contractor or property owner policy if a subcontractor does not have a workers’ compensation policy.
If a ministry intends to enter an independent contractor relationship with a worker, ministry leaders should obtain a legal opinion from a locally licensed attorney to ensure that the relationship is truly an independent contractor relationship. Additionally, working with a locally licensed attorney to develop an agreement between the ministry and the contractor would also be wise.
Important information: Brotherhood Mutual is pleased to provide Legal Assist as a complimentary resource. The services we offer through Legal Assist are intended to provide general legal information to our current and prospective policyholders.
The information we provide on this page is intended to be helpful, but it does not constitute legal advice and is not a substitute for the advice from a licensed attorney in your area. Accordingly, no attorney/client relationship is created through this process, and no legal advice will be provided. We strongly encourage you to regularly consult with a local attorney as part of your risk management program.
