A continuing point of contention in employment law revolves around who is an employee versus who is an independent contractor. The issue seems to come up often in wage and hour cases and workers’ compensation or unemployment claims. The South Carolina Court of Appeals recently addressed the employee/independent contractor question in a workers’ comp case. Read on to see how the court analyzed the issue.

Factual background

On November 8, 2013, Stacey Sellers sustained injuries while he was performing heating, ventilation, and air conditioning (HVAC) work at a single-family home being constructed in the Market Commons subdivision in Myrtle Beach. He fell from a 30-foot extension ladder while he was “trimming out” a house and sustained injuries to his legs, back, and neck. He was subsequently hospitalized.

On November 9, Sellers notified Riverport Insurance Company of his accident. On November 20, Riverport’s third-party claims administrator denied the claim because Sellers had “knowingly and voluntarily” excluded himself from its workers’ comp insurance policy. That same day, Sellers filed a Form 50 naming Tech Service of Myrtle Beach, LLC (TSMB), as a party to his case and requesting a hearing.

On December 13, Sellers filed an amended Form 50 naming Tech Service as a party. Tech Service has six to eight employees, which it shares with TSMB. Before an employee is sent to a particular jobsite, the employee is informed whether the job is for Tech Service or TSMB so he can record the time accordingly.

At a March 25, 2014, hearing before a single workers’ comp commissioner, Sellers testified that he was a longtime employee of both Tech Service and TSMB and that he was in the course and scope of this employment at the time of his accident. He explained that his first cousin, Tracy Davis, is the owner of Tech Service and a co-owner of TSMB.

Sellers claimed that in early 2013, he complained to Davis about not receiving overtime pay or having proper deductions taken from his paycheck. According to Sellers, Davis occasionally avoided paying him overtime by spreading the hours he worked between Tech Service and TSMB. He testified that Davis offered to make him a “1099 employee” (a 1099 is used to report payments made in the course of a trade or business to someone who is not an employee or to an unincorporated business) and help him with his taxes when he filed them.

Sellers stated that Davis gave him $1,250 in cash and instructed him to purchase his own workers’ comp insurance policy for “tax purposes only.” On February 21, he purchased the Riverport policy but excluded himself from it because he believed he was covered by Tech Service’s policy.

In March, Davis began paying Sellers without deducting income taxes and started reporting his wages using a Form 1099 rather than a Form W-2. Although Sellers performed “side work” to make extra money both before and after the March 2013 changes, he denied signing an independent contractor agreement or otherwise changing his employment relationship with Tech Service. Beginning March 4, however, he submitted weekly “Sellers Heating and Cooling” invoices to Tech Service for payment according to Davis’ instructions.

By contrast, Davis testified that Sellers first approached him in January 2013 about his desire to work for himself as a subcontractor because he wanted to make more money. Davis denied that Sellers ever complained about not receiving overtime pay or deductions from his paycheck. However, he had no documentation reflecting the purpose and the nature of his deductions from Sellers’ pay.

Davis told Sellers that he could begin working as a subcontractor after he obtained a workers’ comp insurance policy and adamantly denied giving his cousin cash to purchase the policy. Davis explained that if he was going to give Sellers such funds, he would have given him a check to document the expenditure for his own business records.

Davis learned about Sellers’ accident from Tech Service supervisor Jacob Hamilton. Both Hamilton and Davis told Sellers that he couldn’t file a claim under Tech Service’s policy because recently audited documents reflected that he was a subcontractor.

Based on all of that information, the workers’ comp commissioner issued an order on August 29, 2014, determining that Sellers was an employee of Tech Service at the time of his injury pursuant to Section 42-1-130 of the South Carolina Code (2015). The commissioner dismissed TSMB from the claim. On July 17, 2015, the Workers’ Compensation Commission (WCC) affirmed and adopted the commissioner’s order in its entirety. Tech Services appealed the commission’s decision.

Court’s analysis

The South Carolina Court of Appeals set the stage for its analysis by noting that it was presented with the question of whether Sellers was, at the time of his injury, an employee of Tech Service rather than an independent contractor. The court observed that an independent contractor is someone who independently contracts to do a piece of work according to his own methods, without being subject to the control of an employer except with respect to the result of his work. The court further observed that no benefits are authorized under the Workers’ Compensation Act unless the employer-employee or master-servant relationship existed at the time of the alleged injury for which a claim was made.

The court also noted that the burden of proving the employment relationship is on the claimant—here, Sellers—and the relationship must be established by the greater weight of the evidence. According to the court, South Carolina’s policy is to resolve doubts in favor of coverage under the Workers’ Compensation Act.

The primary consideration in determining whether an employment relationship exists is whether the alleged employer has the right to control the employee in the performance of the work. Four equally important factors are integral to determining the right of control:

  1. Direct evidence of the right or exercise of control;
  2. Furnishing of equipment;
  3. Method of payment; and
  4. Right to fire.

Courts will look at things like whether the worker entered into a contract to alter his status from employee to independent contractor, carried his own workers’ comp insurance policy, and assumed responsibility for all costs associated with the work he was doing. The court of appeals examined the extent to which Sellers satisfied each of the four factors.

Direct evidence of the right or exercise of control. Tech Service argued that it didn’t control the details of Sellers’ work at the time of his injury. The court observed that regardless of whether the company exercised actual control over the details of his work, there was evidence that it had the right to exercise control. The court noted the WCC had found that:

  1. The company instructed Sellers on the work he was to perform, and his work was supervised.
  2. Sellers reported to work as he was instructed by Tech Service.
  3. He didn’t bid for work on any projects he performed for Tech Service, including the project on which he was working when he was injured.
  4. Tech Service didn’t inform the general contractor of the project on which Sellers was injured that he was working as a subcontractor or an independent contractor.
  5. Tech Service directed Sellers to wear a Tech Service uniform, which he wore each workday, including the day of his injury.
  6. Sellers carried Tech Service business cards and service contracts, which he executed with customers as an agent of Tech Service.
  7. Sellers had the authority to order, purchase, and pick up supplies at Gateway Supply using Tech Service’s account.

The court noted that Sellers worked alongside other Tech Service employees under supervisor Jacob Hamilton, who inspected and monitored the quality of his work product. Either Davis or Hamilton would follow up with the customer to ensure its satisfaction with the quality of his work. If an issue arose on a project, Hamilton sent either Sellers or an hourly employee to fix it.

In addition to HVAC work, Sellers performed service calls and sold service contracts to customers, signing them as an employee and agent of Tech Service. He carried Tech Service invoices to jobs and executed between 20 and 100 invoices for the company after March 2013. Although there were some gaps in Sellers’ work for Tech Service from March through November 2013, Davis’ right to control the time, place, and amount of his work weighed heavily in favor of an employment relationship.

Furnishing of equipment. Tech Service contended that Sellers furnished his own equipment at the time of his injury, but the court noted that the evidence indicated:

  1. Sellers wasn’t financially capable of purchasing all the tools necessary to perform the jobs he worked on.
  2. Most of the tools were purchased by Tech Service and provided to Sellers, including the ladder from which he fell on the date of his accident.
  3. Sellers was able to charge any supplies he needed on a Tech Service account.
  4. He didn’t pay for any supplies out of pocket and didn’t have his own supply account.

Moreover, before March 2013, Sellers drove a Tech Service van. He wasn’t responsible for the gasoline, maintenance, insurance, or registration of the van. In March 2013, he “purchased” a used Tech Service van from Davis; however, there was some dispute over whether he ever paid any money for it. LeGrande Todd, another cousin of Sellers, testified that he loaned Sellers $500 to buy the van. Alternatively, Sellers explained that Tech Service deducted $500 from his paychecks. Davis was unable to recall whether Sellers paid with cash or a check, and he didn’t have a record of the sale. Nevertheless, Tech Service was no longer responsible for the gas, maintenance, insurance, or registration on the van.

Sellers testified that Tech Service supplied his ladder several years earlier and he moved it from his company van to his personal van in March 2013. Although he maintained that Tech Service supplied him with other tools as well, Davis claimed that Sellers accumulated the tools over the years and transferred them from his company van to his personal van when he began working as an independent contractor. Davis said that after Sellers switched vans, he “didn’t check behind him that strongly because he was family and [Davis] was trying to help him.”

Davis admitted that Sellers always wore a Tech Service uniform, including on the day of his accident. Additionally, Sellers carried Tech Service business cards. Although he also had “Sellers Heating and Cooling” business cards, he claimed he primarily gave them to other Tech Service employees as an ongoing joke. However, the court was unmoved by the fact that Sellers handwrote “Tech Service” on his tools, including the ladder from which he fell. In the end, it found that Tech Service’s furnishing of equipment for Sellers to use on the job favored a finding of employment.

Method of payment. For this factor, a court generally looks at whether the claimant was paid by the job or by the hour and how he filed his taxes. The court of appeals noted that payment on an hourly basis is a strong indication of an employment relationship, while payment on a completed-project basis is generally indicative of independent contractor status.

The WCC had found that Tech Service determined both the amount and the way Sellers was paid. Specifically, the commission found his income from Tech Service after March 2013 was largely consistent with his income from past years. The most significant change was that the company planned to report his earnings using a Form 1099.

Tech Service paid Sellers on a weekly basis both before and after March 2013. Prior to that date, he was paid $14 an hour, and his wages were reported on a W-2. However, there was a dispute over how his wages were calculated. Sellers testified that his hours were based on a preset amount for completion of a specified job based on the flat-rate pricing book, in which hours worked bear a relationship to the type of job performed. He claimed Davis told him, “I can do this by making you a 1099 employee, but if you do it faster [than the predetermined amount of time], it’s actually like you are making [20] bucks an hour instead of [14] bucks an hour.” Davis maintained that Sellers’ hours were based on the actual time he worked, and he never paid his employees using the flat-rate pricing book. Likewise, Hamilton testified that Tech Service employees were paid on an hourly basis.

After March 2013, Sellers was paid on “Sellers Heating and Cooling” invoices he submitted to Davis, and his wages were reported on a 1099. Davis told Sellers the invoices were necessary for tax purposes and they needed to “look like an invoice.” Sellers explained the invoices were for amounts set by Davis based on how much time he determined it should take to complete a job. He testified that several weeks before his accident, Davis told him, “We’re probably going to have to go back to paying you by the hour like we were originally paying you.”

There was no employment contract between Sellers and Tech Service. However, it was clear that Sellers received the majority of his income from Tech Service both before and after March 2013. The only other entities from which he received minimal compensation were TSMB and his cousin Todd’s plumbing company.

The court found that although it wasn’t as strong as the other factors, the method of payment evidence weighed in favor of affirming the WCC’s finding of an employment relationship between Sellers and Tech Service.

Right to fire. Tech Service argued that it didn’t have the right to terminate Sellers without liability at the time of his injury. In analyzing this factor, the court found the evidence that Davis and Hamilton supervised, inspected, and monitored the quality of Sellers’ work product supported the finding that Tech Service had the right to terminate its working relationship with him without liability.

In conjunction with the direct evidence of Tech Service’s right to exercise control over Sellers’ work, the “right to fire” factor further favored a finding of an employment relationship. Accordingly, the court affirmed the WCC’s conclusion that the greater weight of the evidence supported the finding that Sellers and Tech Service had an employment relationship at the time of his accident.

Lessons for employers

Many employment statutes include language suggesting that coverage should weigh in favor of the employee (or in favor of an employment relationship) so employees can benefit from statutory protection. But different statutes use different standards to assess whether an employment relationship exists. While one argument may work under one statute, the same argument may be insufficient to meet the criteria of another statute. That can be confusing, but until a single standard for determining employment status is established, employers must assess each case under the relevant statute on an individualized basis.

Likewise, don’t fall into the trap of latching onto the method of payment as the determining factor in the independent-contractor-versus-employee analysis. A court will look at all the factors rather than singling out one factor as more important than the others. Make sure you have ample evidence to support your argument.

If your company needs some advice or documentation to ensure this doesn’t happen to you, our HR Compliance Cloud can help.