Are Independent Contractors Always Exempt From I-9 Requirements?

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Employers rarely question the general rule that independent contractors are not required to complete a form I-9. Most employers believe that, if an individual is labeled as an independent contractor, a form I-9 is not required. In our experience defending clients in I-9 enforcement audits by the Immigration and Customs Enforcement (ICE), individuals that an employer considers to be independent contractors are not given an all-inclusive exemption from the I-9 requirement. In fact, most Notices of Inspection, served by ICE as a result of an I-9 audit, demand that employers produce a list of independent contractors utilized in addition to all forms I-9 for employees. In addition, ICE agents typically question employers to determine if independent contractors are properly labeled as such. If the independent contractors receive significant control or supervision from the employer, are involved in the production of the employer’s products or engage in an essential function or service central to the employer’s business, ICE is likely to request that the employer provide valid I-9 forms for each contractor. If such forms do not exist, ICE could seek a penalty of up to $1,100 per contractor.

So how can an employer determine if an individual is a true “independent contractor” for purposes of the I-9 requirement? A recent decision by the Office of the Chief Administrative Hearings Officer (OCAHO) illustrates the methodology generally used by the courts to answer this question. In U.S. v. Siddikov, ICE filed a complaint seeking penalties for certain I-9 failures and alleging that Saidabror Siddikov d/b/a Beyond Cleaning Services (BCS) failed to prepare, retain or present I-9 forms for six individuals. The owner argued that all six individuals were independent contractors, and that therefore forms I-9 were not required for them. On August 14, 2015, OCAHO issued a decision dismissing the government’s complaint seeking a penalty for I-9 violations and finding that the employer did not have to produce forms I-9 for certain individuals who were deemed to be independent contractors for employment verification purposes.

In order to determine whether an individual is an independent contractor or an employee, OCAHO case law looks at the federal regulations as well as various tests defined in case decisions. Independent contractors are defined by applicable regulations to include “individuals or entities that carry on independent business, contract to do a piece of work according to their own means and methods and are subject to control only as to results.” Among the factors to be considered are whether the individual supplies the tools or materials, makes services available to the public, works for different clients at the same time, directs the order or sequence in which the work is to be done and determines the hours in which the work will be done.

OCAHO case law has observed, in another context, that where an individual provides labor or services only to a third party, and the putative employer has no power to fire the individual, to set the individual’s work schedule or working conditions, to assign work or to supervise the individual, there simply are not sufficient indicia to establish an employment relationship.

A variety of tests have been identified in federal case decisions, including the common law standard test similar to the 10-factor control test as well as an “economic realities” test. The majority of the tests look to the question of control over the details of the work as being of primary importance, and even the economic realities test also assumes that the degree of control or supervision over the work will be a critical component. So does the so-called IRS test, which looks for both behavioral control and financial control, as well as the type of relationship between the parties.

For example, the 10-factor test is described as follows: “In determining whether a hired party is an employee under the general common law of agency, we consider the hiring party’s right to control the manner and means by which the product is accomplished. Among the factors relevant to this inquiry are the skill required; the source of the instrumentalities and tools; the location of the work; the duration of the relationship between the parties; whether the hiring party has the right to assign additional projects to the hired party; the extent of the hired party’s discretion over when and how long to work; the method of payment; the hired party’s role in hiring and paying assistants; whether the work is part of the regular business of the hiring party; whether the hiring party is in business; the provision of employee benefits; and the tax treatment of the hired party.”

With respect to the economic realities test, courts have identified five relevant factors: “1) the permanency of the relationship; 2) the degree of control exercised by the alleged employer; 3) the skill and initiative required to perform the job; 4) the extent of the relative investments of the worker and the alleged employer; and 5) the degree to which the worker’s opportunity for profit and loss is determined by the alleged employer.” The focus of this test is on whether “as a matter of economic reality, the worker is economically dependent upon the alleged employer or is instead in business for himself.” No single factor is determinative; instead, each factor helps gauge the economic dependence of the alleged employee.

In practice, Courts generally look at the totality of the circumstances and not a single determinative factor or test.

In Siddikov, OCAHO found the following as a matter of fact:

  • None of the work was performed on BCS’ premises;
  • There was no supervision or control either by BCS or by Siddikov himself;
  • Most of the relationships were short-lived;
  • The discrete jobs were on-again-off-again in nature;
  • The individuals had been treated all along as autonomous;
  • Two of the individuals apparently had their own companies;
  • Two others had regular jobs and moonlighted doing the floor jobs on the side;
  • While the individuals did not provide their own supplies or equipment, BCS and Siddikov did not provide their supplies or equipment either; these were provided by the customers.
  • The choice of whether payment was made at an hourly rate or by the job was the customers’ choice as well;
  • The individuals did the work according to their own means and methods without control by BCS, their services were available to others, and they worked for different clients at the same time.

Considering the totality of the circumstances, OCAHO found that, apart from the fact that the actual work itself is unskilled, the remainder of the regulatory and common law factors pointed in the direction of independent status for all six individuals. The government did not present evidence that any of these individuals was an essential part of Siddikov’s normal business operations; they did not work for BCS either full time or exclusively, but simply provided Siddikov with an opportunity to “farm out” jobs he was unable to complete himself. There appeared to be no permanent ongoing arrangements and no obligations on either side, whether for BCS to offer or for any of the individuals to accept, additional jobs in the future.  ICE did not introduce any evidence that the individuals were economically dependent upon Siddikov or BCS for his or her livelihood as contemplated by the economic realities test. Where an individual actually goes to the customers’ own premises to provide relatively unskilled services, such as cleaning carpets or reading utility meters, the tasks to be performed will seldom be directly supervised or controlled by the company offering the services. When an individual provides labor or services only to a third party, and the putative employer has no power to fire the individual, to set the individual’s work schedule or working conditions, to assign work or to supervise the individual, there simply are not sufficient indicia to establish an employment relationship between the individual and the putative employer.

The takeaway from the above case is that an employer should not blindly assume that an individual does not need a form I-9 just because he or she is considered to be an “independent contractor” for some purposes not related to I-9 compliance. It is important to determine if, in the event of an I-9 audit, the government would apply the above tests and determine that an individual is actually an employee for I-9 purposes. Further, employers must understand that, while true independent contractors are not required to complete form I-9, employers may still be liable for knowingly employing unauthorized workers if they have actual or constructive knowledge of the independent contractors’ unauthorized status.

As regularly reported in the news, the crackdown on employers by the federal government continues. If your company is targeted and I-9 violations are discovered, fines for simple paperwork violations, even if no undocumented workers are discovered, will range from $110 to $1,100 per I-9 Form depending on the severity of the errors. Penalties for knowingly hiring or continuing to hire undocumented individuals range from $375 to $16,000 per individual. In addition, the company owner, managers and human resources professionals can be held criminally liable for certain infractions.

It is important to have an established procedure for handling government audits of your I-9 Forms and to contact experienced immigration counsel even before becoming the subject of an audit. Our firm provides a variety of services related to I-9 compliance, including voluntary audits and training, as well as representation in connection with enforcement audits by ICE. We have represented and advised employers in multiple industries with relation to I-9 compliance, including hospitality, restaurant, landscaping, production, retail, staffing, manufacturing, higher education, service provider and financial industries.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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