Implementation of Projects

Hiring or Contracting

Should a water fund hire or contract for the services it needs?

Whether to hire or contract for services depends on how a water fund is organized, the services required, and applicable law. It is important to bear in mind that whether a service provider is an employee or a contractor is not solely a matter of choice by the water fund. The laws applicable to the location where the water fund operates may characterize certain service providers as employees, regardless of the intention or agreement of the parties.

What are the differences between employees and contractors?

Local laws regarding employment vary. A water fund should seek advice from an expert in the laws in the place where it operates. At a high level of generality, however, all legal systems recognize a distinction between procuring services from an individual who is an employee, and procuring services from an individual who is an independent contractor. Most legal systems have significant regulations in place to protect employees, including eligibility to work under immigration laws, wage and hour restrictions, health and safety requirements, anti-discrimination requirements, and social insurance and other taxes. By contrast, independent contractors are treated as working for their own businesses. They have more latitude to negotiate contract terms addressing selection of staff, project deadlines, performance requirements, and penalties for termination. A third possibility is for a water fund to procure services from a staffing firm. The individuals are employees with respect the staffing firm, which is an independent contractor with respect to the water fund.

A water fund should bear in mind that government agencies, insurance companies, and workers themselves, have incentives to characterize relationships as employment relationships in order to obtain tax revenues, insurance coverage, overtime pay, and other benefits associated with employment. In the United States, for example, certain government agencies presume that every worker is the employee of someone, so a contracting party is at risk of being considered an employee unless the worker is part of a staffing organization or another independent business, preferably one that is formally organized as a corporation or other entity. It goes without saying that a water fund should not try to classify workers as independent contractors in order to avoid the application of certain laws, such as immigration laws restricting the employment of foreign workers. Rather, a water fund should verify that independent contractors themselves comply with applicable laws.

What factors affect whether a worker is an employee or a contractor?

There is no single answer to the question of how to distinguish an employee from a contractor. Different government authorities have different definitions. Within the United States Federal Government, the Internal Revenue Service (which administers tax laws) and the Department of Labor (which administers wage and hour laws) use different tests. The Internal Revenue Service has a 20-factor test, whereas the Department of Labor concentrates on economic dependence. Agencies of individual states within the United States have developed their own criteria. Within the European Union, individual countries set the rules that determine whether a worker is an employee or an independent contractor.

Although the number of variants is disconcerting, there is substantial overlap among the different worker classification tests. Below is a list of factors that indicate an independent contractor relationship.

Written contract. An independent contractor should have a written contract governing the work. The contract should specify an end date for the relationship and describe the deliverables or services to be performed.

Limited supervision and control. An independent contractor should be free to determine how to perform the work, with what methods and with what tools and equipment. The written contract should expressly limit the degree of control exercised by the hiring party, and these limits should be observed in practice.

Reporting. Required oral or written reports suggest an employment relationship.

Time and place of work. Typically, an independent contractor will choose the time and place to perform the work. By contrast, an employee usually works specified hours on the employer’s premises. An independent contractor should be free to determine the order or sequence in which tasks are performed.

Own tools and equipment. An independent contractor often provides its own tools and equipment. By contrast, issuing an employee badge or email account suggests an employment relationship.

Termination of relationship. Whereas an employer often reserves the right to terminate an employee at will, someone who terminates an independent contractor will incur consequences under the contract. Similarly, an employee typically can quit at will, whereas an independent contractor will incur liability for failure to complete a contract.

Remedies for failure to perform. If an independent contractor fails to achieve the end result, the remedy is breach of contract, not disciplinary action.

Payment terms. It is better to pay an independent contractor by the project or deliverable, rather than by the hour or other time period. It is also important to comply with taxes and reporting that apply to contractors, such as IRS Form 1099-MISC, not taxes and reporting that apply to employees, such as IRS Form W-2.

No reimbursement of expenses. An independent contractor should not be reimbursed for work-related expenses.

Opportunity for profit. An independent contractor should have an opportunity to profit under the terms of the contract. Often, an independent contractor has made a significant investment in its business.

Non-exclusivity. An independent contractor typically will have multiple work relationships and will offer services to the general public. The contract should not require exclusivity.

Duration. The longer a relationship last, the more likely it is to be viewed as employment.

Work Schedule. Full-time work indicates an employment relationship.

Staffing. An independent contractor typically is free to designate who will perform the work, including subcontracting the work to others. By contrast, an employee does not hire, supervise, or pay assistants. A requirement to perform services personally indicates an employment relationship.

Expertise. An independent contractor often will have a professional degree or other specialized expertise related to the work to be performed. By contrast, an employer often provides job training or detailed instructions to its employees.

Services integration. An independent contractor typically is free to designate who will perform the work, including subcontracting the work to others. By contrast, an employee does not hire, supervise, or pay assistants. A requirement to perform services personally indicates an employment relationship.

Comparable workers. Workers who have similar job duties should be classified in the same way. It is a red flag if an independent contractor is paid to do work similar to work performed by employees. This inconsistency is acute if the employees and independent contractors work for the same entity. But, it is also a concern if other entities in the same sector, such as competitors, classify workers performing similar duties as employees rather than as independent contractors.