Kara Sears
Whether an attorney can be an independent contractor and a partner in a law firm is a complex issue that depends on various factors. The classification of a worker as an independent contractor or employee has legal, tax, and ethical implications, and misclassification can result in penalties and litigation. The determination of whether an attorney is an independent contractor or employee depends on the specific facts of each case and the laws of the state, with tests like the ABC test and the Borello test providing criteria for classification. Ethical considerations, such as conflicts of interest and duty of loyalty, also come into play when attorneys work with multiple firms.
| Characteristics | Values |
|---|---|
| Nature of the employment relationship | The IRS considers several factors to determine whether an individual is an employee or an independent contractor. |
| Degree of control | An independent contractor decides the "result of the work" and how it will be done. An employee's work is controlled and directed by the employer. |
| Employment taxes | Earnings of an independent contractor are subject to self-employment tax. An employee's earnings may be subject to FICA (social security and Medicare tax) and income tax withholding. |
| Forms | Payments to independent contractors are reported on Form 1099-NEC. Employees' earnings are reported on Form W-2. |
| Equity ownership | Law partners are often equity owners of a law firm and are not considered independent contractors. |
| Employment protection | Only "employees" are protected under the WLAD and federal employment discrimination acts (e.g., ADA, ADEA). Law partners are not protected against wrongful termination due to discrimination. |
| Ethical and loyalty issues | Working simultaneously as an attorney and an independent contractor for another company may raise ethical and loyalty issues. |
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What You'll Learn
Law partners are not independent contractors
The distinction between an independent contractor and an employee is a significant one, with different tax, employment law, pension, and fringe benefit implications. While lawyers can be independent contractors or employees, law partners are not independent contractors.
The primary distinction between an independent contractor and an employee is the degree of control exerted by the employer over the worker. An independent contractor is self-employed, and the person they are performing a service for has the right to control or direct only the result of the work, not what will be done and how it will be done. An independent contractor clause in a contract can clarify this relationship. However, if an employer-employee relationship exists, even if it is not explicitly stated, then the worker is not an independent contractor.
In the case of law partners, they are equity owners of the law firm and have a significant degree of control over major corporate decisions, business operations, and hiring and firing decisions. This level of control and ownership sets them apart from independent contractors, who are typically autonomous agents conducting independent business.
Furthermore, the characterization of a law partner as an employee has legal consequences. For example, in the state of Washington, the application of the Washington Wage Act (RCW chapters 49.48 and 49.52) can impact monetary disputes when a partner leaves a firm. If the firm has treated the partner as an employee, the dispute can become a wage claim, exposing the firm to liability for unpaid compensation, double damages, and personal liability of the remaining partners.
Additionally, the characterization of a partner as an employee can have implications for wrongful termination provisions under the Washington Law Against Discrimination (WLAD) and federal employment discrimination acts. While it is settled law that equity owners of law firms, including law partners, are not protected against wrongful termination due to discrimination, if a court determines that a partner is an employee based on the presence of "badges of employment," they may be protected against discriminatory treatment.
In conclusion, law partners are not independent contractors due to their ownership stake and degree of control within the firm. The characterization of law partners as employees or independent contractors has significant legal and financial implications, and it is essential for law firms to carefully consider the potential consequences of each classification.
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Equity owners of law firms are not protected against wrongful termination
Whether an individual is an independent contractor or an employee depends on the facts of each case. The general rule is that an individual is an independent contractor if the person for whom the services are performed has the right to control or direct only the result of the work and not what will be done and how it will be done. If given freedom of action, but the employer still has the legal right to control the details of how the services are performed, then an employer-employee relationship exists, and the individual is not an independent contractor.
Law firms must be cautious when employing independent contractors, as there have been cases where the IRS deemed a lawyer to be an independent contractor, resulting in tax compliance issues. In such cases, the IRS has partnered with the U.S. Department of Labor to allow eligible employers relief from past federal payroll tax liabilities if they treat workers who have been improperly classified as independent contractors as employees.
Equity owners of law firms, like any other business owners, are vulnerable to forced exits due to unforeseen circumstances such as health issues, economic shifts, or key team members leaving. Without a clear succession plan, the firm's value, reputation, and client relationships are at risk. Owners can protect themselves by creating a well-designed exit strategy that includes options for internal succession, external sale, phased retirement, or merger.
In the case of wrongful termination, equity owners may seek compensation for lost stock or equity as damages. Courts have recognized stock as a component of compensation and can award aggrieved employees their lost stocks or equity in the business. However, the availability of equity damages as a matter of law is frequently disputed, and defendants may challenge the valuation of equity, especially in privately held companies.
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Independent contractors are self-employed
Whether an individual is an independent contractor or an employee depends on the facts of each case. An individual is generally considered an independent contractor if the employer has control over the result of the work but not over what will be done and how it will be done. Independent contractors are typically self-employed, and their earnings are subject to self-employment tax. They are responsible for finding their own work and are not guaranteed a regular salary. They are often hired to fill short-term needs or complete project-based work, with the scope of work defined in a written contract.
In the context of a law firm, an attorney can work as an independent contractor for another company, but this may raise ethical and loyalty issues with the firm. It is important to disclose such arrangements to the firm and conduct conflict checks to ensure no conflicts of interest arise.
The distinction between an independent contractor and an employee is crucial for tax purposes. The IRS has initiated an intensive employment tax research study to investigate tax compliance issues related to independent contractor classification. Misclassification can result in significant liabilities for employers, as seen in the Western Management Inc. v. U.S. case, where the lawyer and his spouse were held personally liable for the firm's unpaid employment taxes.
To determine whether an individual is an independent contractor or an employee, businesses must consider various factors, including the degree of control and independence in the relationship. There is no single factor that determines the classification, and each situation may present unique factors to consider.
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The IRS determines independent contractor status
The IRS considers the relationship between the worker and the business, examining all evidence of the degree of control and independence in this relationship. These factors fall into three categories: behavioral control, financial control, and the relationship of the parties. Behavioral control refers to the right of the business to direct and control the work accomplished and how it is done through instructions, training, or other means. Financial control refers to the business's right to direct or control the financial and business aspects of the worker's job, including unreimbursed business expenses.
The IRS is currently in the second year of an intensive employment tax research study of 6,000 randomly selected taxpayers, investigating tax compliance issues related to employment taxes and independent contractor classification. Businesses that continually hire the same types of workers to perform particular services may want to consider filing Form SS-8, and the IRS will review and determine the worker's status.
It is important to correctly classify workers as misclassification can lead to issues with the IRS. For example, in Western Management Inc. v. U.S., a lawyer and his spouse were held personally liable for their firm's unpaid employment taxes as the lawyer was deemed an employee and not an independent contractor.
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Independent contractors offer services to the general public
Independent contractors are self-employed individuals or entities contracted to perform work for, or provide services to, another entity as non-employees. They are responsible for paying their own taxes and are not entitled to the same benefits as employees, such as health insurance or retirement accounts. Independent contractors have greater freedom and control over their work, including setting their hours, pursuing their interests, and choosing their clients. They also have the opportunity to build their own business and determine their earnings.
In the legal profession, the discussion around independent contractors centres on ethical considerations and potential conflicts of interest. Attorneys working at law firms may seek to work as independent contractors for other companies, which can raise concerns about loyalty and potential conflicts. It is important to disclose such arrangements to the firm and conduct conflict checks to ensure compliance and ethical practice.
The distinction between an employee and an independent contractor is crucial for tax purposes. The Internal Revenue Service (IRS) defines an independent contractor as someone who offers their services to the general public but whose work is controlled by the payer only in terms of the desired result, not the means or methods used to achieve it. This definition includes professionals such as doctors, lawyers, accountants, and contractors, as well as subcontractors, writers, and software designers.
Determining whether an individual is an employee or an independent contractor can be complex, and misclassification can lead to legal and financial consequences. The IRS provides resources to help businesses and individuals make this determination correctly, and businesses are encouraged to review employment data, especially in the fourth quarter, to ensure proper classification and avoid issues with the IRS.
In summary, independent contractors offer their services to the general public, enjoying the benefits of self-employment and greater freedom. However, they must also navigate complex tax obligations and, in certain professions, ethical considerations to ensure compliance and maintain positive relationships with clients and peers.
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Frequently asked questions
No, law partners are not independent contractors. Law partners are equity owners of a law firm and are therefore not protected against wrongful termination due to discrimination.
An independent contractor is self-employed and has control over their work, whereas an employee's work is controlled by their employer.
There is no "set" number of factors that determine whether a worker is an independent contractor or an employee. However, the IRS considers the degree of control over the worker, the manner of taxation, and whether the worker is referred to as an "employee" in their contract.
Hiring an independent contractor offers the benefits of no agency liability, no federal and state discrimination laws, and no fringe benefits or pension plans.
