Michael J. Karlan

Kurt L.P. Lawson and Michael J. Karlan

Covington & Burling, Washington, D.C.

I. OVERVIEW

Employees and employers face substantially different treatment from independent

contractors and their clients under a wide range of laws, including federal and state employment

tax, income tax and labor laws. This outline describes some major differences in treatment

between employees and employers on the one hand and independent contractors and their clients

on the other, and the factors used to distinguish between them, under selected state and federal

statutes.

These differences are important because they help define the legal rights and obligations

of workers and their clients or employers. However, they assume particular importance in the

case of workers whose employment status is unclear. The parties have more leeway to decide

whether to treat such workers as employees or independent contractors, and these differences

are (or should be) taken into account in making that decision. Also, the employment status of

such workers is more likely to be changed or challenged after the fact, making compliance with

applicable legal requirements more difficult.

II. FEDERAL TAX LAW

B. Differences in Treatment

1. Employment Taxes

Social Security and Medicare. Compensation paid to employees is subject to Social

Security and Medicare taxes, if at all, under the Federal Insurance Contributions Act ("FICA").

By contrast, compensation paid to independent contractors generally is subject to Social Security

and Medicare taxes, if at all, under the Self-Employment Contributions Act ("SECA").

Since 1990, the combined tax rates on employees and their employers on the one hand

and independent contractors and their clients on the other have been virtually identical under

both FICA and SECA. Before 1983, the tax rates on independent contractors were substantially lower, even though they were generally eligible for the same Social Security and Medicare benefits as employees. Legislation in 1983 mostly enated the rate differential effective in 1984, and made other conforming changes that became folly effective in 1990.limi

Some differences still remain, however. In some cases they can be substantial. While

the gross tax base generally is the same under FICA and SECA, items that reduce FICA wages

generally do not reduce SECA income unless these items are deductible on Schedule C for

income tax purposes. In particular, contributions to a qualified pension plan or an accident and

health plan generally are not includible in FICA wages, but are included in SECA income.

Contributions to certain nonqualified plans might also receive more favorable treatment under

FICA. Finally, FICA wages of an employee-shareholder of a corporation are limited to

amounts distributed to him or her as compensation, whereas the SECA income of a general

partner generally includes his or her entire distributive share of partnership income.

On the other hand, trade or business expenses may be deducted from compensation

before SECA compensation is calculated, but cannot be so deducted for FICA purposes, and

higher FICA taxes may be imposed on the employer when an employee changes jobs in mid-

year. Finally, unlike employees, independent contractors who are eligible for Social Security

benefits sometimes can avoid application of the Social Security earnings test through the use of

deferred compensation.

Unemployment Insurance. The first $7,000 of wages paid to an employee generally are

subject to tax under the Federal Unemployment Tax Act ("FUTA"). Under the integrated

federal/state system, part of the tax is ordinarily paid to the state of employment, while part is

paid to the federal governrnent; the combined rate is 6.2 percent through 2007. The federal

portion of the tax is paid quarterly. Independent contractors are not subject to FUTA tax, but

likewise generally are not eligible to receive any unemployment benefits.

2. Income Taxes

Collection Mechanisms. Income taxes on employees are collected mainly through the

withholding system, whereas income taxes on independent contractors are collected mainly through the estimated tax system. Both systems are backed up by information reporting requirements imposed on service-recipients.

Employers are required to withhold a portion of their employees' wages as they are paid

and remit it to the federal government as payment of the employees' income taxes. Withholding

rates are specified in tables and procedures published by the Internal Revenue Service ("IRS"),

and are calculated to colect approximately the same amount of tax as the employees ultimately

will owe with respect to the wages if they work all year at the same wage level. Clients of an

independent contractor generally are not subject to a withholding requirement unless the

independent contractor is subject to backup withholding.

Unless certain exceptions apply, both employees and independent contractors must pay

their estimated income tax liabilities for the current year in quarterly installments throughout the

year. The installments are due on April 15, June 15, and September 15 of the current year, and

January 15 of the following year. The amount of each installment generally is one quarter of

the lesser of the taxpayer's income tax liability for the prior year, or 90 percent of his or her

liability for the current year. Because of withholding, however, employees generally do not

have to make any estimated tax payments. This is because withholding generally requires earlier

payments than would be necessary under the estimated tax system, and these amounts are

credited towards employees' estimated tax obligations. Thus, employees generally are required

to make estimated tax payments only if they have substantial non-wage income.

Employers generally must report all wages paid to an employee annually on Form W-2.

Similarly, clients generally must report all compensation paid to an independent contractor

annually on Form 1099-MISC; no Form 1099-MISC generally is required, however, for

payments to a corporation, payments that are not made by a business, or payments to a service-

provider that aggregate less than $600 in a calendar year.

Forms W-2 must be sent to the employee and to the Social Security Administration. The

Social Security Administration subsequently sends information from the forms to the IRS. In

addition, the employee is required to attach Forms W-2 that he or she receives to his or her

income tax return. Using this information, the IRS can determine whether wages have been

under-reported. While Forms 1099 must be sent to the independent contractor and the IRS,

there is no requirement that they be attached to the individual's income tax return.

Trade or Business Expense Deductions. Under current law, independent contractors face

fewer restrictions on their ability to deduct trade or business expenses than do employees. In

particular, employees (but not independent contractors) generally may not deduct their trade or

business expenses unless they itemize their deductions on their federal income tax returns, and

even then only to the extent that these deductions exceed two percent of the employee's adjusted

gross income from all sources. Also, employees must satisfy additional requirements before

they may deduct their automobile, home office and certain other expenses.

Independent contractors' trade or business expenses generally are deductible "above-the-

line," i.e., as a direct reduction in their business income reported on Schedule C. Employees'

trade or business expenses, by contrast, generally are deductible only "below-the-line," i.e., as

itemized expenses. Especially for lower-income employees, use of the standard deduction is

often more favorable than itemization of expenses; such individuals effectively get no tax benefit

from their trade or business expenses. In addition, since 1986, employees' trade or business

expenses generally have been deductible only to the extent that these expenses (plus any other

miscellaneous itemized deductions) exceed two percent of the employee's adjusted gross income

from all sources.

 The two-percent floor generally does not apply to an employee's trade or business

expenses to the extent that these expenses are reimbursed by his or her employer: in such a case,

generally no deduction is necessary, because the reimbursement is not included in the employee's

taxable income in the first place. Only reimbursement arrangements that require the employee

to account to the employer for any expenditures are eligible for this treatment, however. This

prevents employees from excluding from income an amount greater than that which they could

have deducted. Client reimbursements always are included in an independent contractor's

gross income, and the expenses for which these reimbursements are made must be deducted.

Inadequate accounting by the independent contractor to the client is therefore generally irrelevant

in this context.

Unlike independent contractors, employees may not deduct interest expenses incurred in

their trade or business of being an employee: such interest is considered a personal expense.

Entertainment expenses generally may not be deducted unless they satisfy the business

purpose requirements of section 274(a). The rules applicable to employees and their employers

on the one hand and independent contractors and their clients on the other are about the same

for this purpose. Special exemptions are provided, however, for food or beverages furnished

on an employer's business premises primarily for its own employees, and for recreational or

social activities primarily for their benefit. Independent contractors may, however, benefit

from both as long as they are not provided primarily for the contractors' benefit.

Travel and entertainment expenses, business gifts, and expenses associated with "listed

property" (including automobiles, computers, cellular telephones and property used for

entertainment) also may not be deducted unless the taxpayer has adequate records or other

evidence to substantiate their amount and business purpose, within the meaning of section

274(d). Again, the rules applicable to employees and their employers on the one hand and

independent contractors and their clients on the other are about the same. Employers may use

certain simplified substantiation methods that are unavailable to clients of independent

contractors, however. In particular, they may rely on records maintained by their employees

with respect to the use of listed property, and they can avoid any substantiation requirements

with respect to the use of vehicles by adopting a policy statement prohibiting personal use and

meeting certain other requirements. These methods might be denied to clients of independent

contractors because clients generally do not provide them with the property necessary to perform

their jobs, and, in any event, cannot supervise the independent contractors' use of the property

very closely.

Business meal expenses generally may not be deducted unless the taxpayer or one of its

employees is present. Independent contractors may be treated as employees for this purpose

only if they render "significant services" to the taxpayer.

Home office expenses and rental and depreciation expenses associated with listed property

(as described above) might be subject to special deduction limits unless these expenses meet

certain business use requirements. These limits were tightened substantially in the Tax

Reform Act of 1986 ("TRA '86"). The limits for employees and independent contractors

generally are the same except that, in the case of home office expenses, the employee's business

use also must be "for the convenience of the employer," and, in the case of listed property

such as home computers, such use must be "for the convenience of the employer and required

as a condition of employment." These standards are difficult for many employees to meet.

For purposes of the alternative minimum tax, miscellaneous itemized deductions are an

adjustment item. Trade or business expenses are a miscellaneous itemized deduction for

employees. Accordingly, for purposes of the alternative minimum tax, trade or business

expenses are not deductible for employees but are deductible for independent contractors.

Employee Benefits. Independent contractors generally are not taken into account under

the employee benefit provisions of the Internal Revenue Code ("Code"). On the one hand, this

means that independent contractors' clients generally are not required to include them in any

pension or welfare benefit plans they provide for their employees in order to avoid discrimination in favor of highly

 compensated employees and otherwise maintain the plans' tax-qualified status, and the independent contractors have correspondingly greater freedom to structure their own benefit arrangements. On the other hand, this means that independent contractors generally are not allowed to participate in such plans even if they want to do so and their clients agree, and some of the benefit arrangements that independent contractors establish for themselves as sole proprietors or partners might not be tax-favored.

The Code provides tax-favored treatment for a wide range of common employee benefits,

including pension plans, group-term life insurance plans and accident and health plans. In many

cases, such treatment is not available for benefits provided to highly compensated workers unless

the employer also provides comparable benefits to a minimum number of its nonhighly compensated workers. Generally, only an employer's common law employees (and independent

contractors treated as employees under the Code) are taken into account for this purpose. In

addition, these same provisions generally prohibit an employer from offering tax-favored benefits

to its independent contractors. A list of tax-favored benefits, and the conditions under which

they may be offered to employees and independent contractors, are shown in Table A.

An independent contractor who is unable to participate in his or her client's plans

generally can establish his or her own benefit arrangements in his or her capacity as a sole

proprietor (or as a partner, if he or she is in business with other individuals). As indicated in

Table A, some of the more substantial types of employee benefits might be available on a tax-

favored basis.

B. Determination of Employment Status

The status of a worker as an employee or independent contractor for federal tax purposes

is, with few exceptions, determined under the common law test for determining whether a

master-servant (employment) relationship exists.

Background. The common law test focuses exclusively on the employer's control or right

to control how an employee does his job. It first assumed importance under the employment

tax provisions of the Code. The original Social Security Act simply defined an "employee" as

including "can officer of a corporation." Treasury regulations issued in 1936 used the

common law test to determine employee status. The lower courts, however, applied a variety

of different tests, some relying less than others on common law precedents. In 1947, the

Supreme Court issued a pair of opinions that attempted to clarify the governing tests. In

these opinions, the Court applied an "economic reality" test under which "employees are those

who as a matter of economic reality are dependent on the business to which they render

services." Obviously, the economic reality test, which focused on dependency, had the

potential to treat many more workers as employees than the common law test, which focused

on control.

The IRS (and the Social Security Administration) proposed amendments to their

regulations to incorporate the Court's new economic reality test, but these never took effect:

Congress reacted immediately by passing (over President Truman's veto) the so-called Gearhart

Resolution, endorsing the use of the common law test.

Current Rules. Current Treasury regulations provide that an individual generally is an

employee if, under the common law test, the relationship between the individual and the person

for whom he or she performs services is the legal relationship of employer and employee. Such

a relationship generally exists if the person for whom the services are performed:

has the right to control and direct the individual who performs the services, not

only as to the result to be accomplished by the work but also as to the details and

means by which that result is accomplished. That is, an employee is subject to

the will and control of the employer not only as to what shall be done but [also]

how it shall be done.

Over the years, the IRS has identified 20 important factors for determining when the common

law test is satisfied. These factors are listed in Table B. Recently, the IRS has begun

emphasizing that these factors are not the only ones that may be taken into account, or even the best way to approach the classification issue. The IRS has not departed from the basic common

law test, which focuses on control. However, the IRS instructs its agents to take all of the facts

and circumstances into account in determining whether sufficient control exists, and to organize

them according to whether they relate to behavioral control, financial control or the relationship

of the parties.

Statutory Employees. Congress and the courts have overridden the common law test in

some situations. Some individuals are treated as independent contractors for tax purposes

regardless of the circumstances. These include certain door-to-door salesmen and real estate

agents. Clergy generally are treated as independent contractors for employment tax purposes

regardless of the circumstances. Conversely, some individuals are treated as employees for

employment tax purposes regardless of the circumstances. These include certain full-time life

insurance salesmen, agent-drivers and commission-drivers engaged in the distribution of specific

kinds of products, homeworkers and traveling or city salesmen.

Section 530. Section 530 of the Revenue Act of 1978 provides statutory relief from

reclassification for certain employers involved in employment tax controversies with the IRS.

Generally speaking, section 530 prohibits the IRS from challenging an employer's treatment of

an employee as an independent contractor for employment tax purposes if the employer has a

reasonable basis for such treatment and certain other requirements are met. It also generally

prohibits the IRS from issuing regulations or publishing revenue rulings addressing the status of

workers as employees or independent contractors for employment tax purposes. Section 1706

of the Tax Reform Act of 1986 excludes taxpayers that broker the services of technical services

workers from coverage under section 530.

Relevance of Incorporation. An employee generally cannot change his or her status to

that of an independent contractor via incorporation. The common law test focuses on the

relationship between the individual performing the services and the service-recipient; if an

employment relationship exists, it generally is irrelevant whether payments are made directly or

through a corporation controlled by the individual.

An independent contractor also generally cannot change his or her status to that of an

employee of his or her client via incorporation; he or she may, however, be treated as an

employee of his or her own personal service corporation for certain purposes, and derive certain

tax benefits as a result. The effect depends in part on whether the personal service corporation

elects to be taxed as a Subchapter S corporation under section 1362 of the Code. If it does not,

the individual will generally be treated as an employee of the corporation for income and

employment tax purposes, and can thus take advantage, inter alia, of various employee

benefit provisions of the Code. The individual will, moreover, not be subject to the two-percent

floor on itemized deductions or other limits on employee trade or business expense deductions

to the extent he or she causes such expenses to be deducted at the corporate level.

If the personal service corporation does elect to be taxed as an S corporation, the

individual generally also will be treated as an employee of the corporation for income and

employment tax purposes, with one significant exception: assuming his or her ownership

interest exceeds two percent, he or she will be treated as a partner for purposes of the employee

fringe benefit provisions of the Code. The treatment of trade or business expenses is roughly

the same as for a C corporation.

Relevance of Contract. Language in a contract is not dispositive in determining whether

a worker is an employee or independent contractor for federal tax purposes. Nevertheless,

a contract might be relevant in making that determination to the extent it provides evidence of

the parties' intent, the extent to which the service-recipient can control and direct the worker,

and other factors taken into account in making that determination. A contract also can be

used to clarify the effect of a worker's status as an employee or independent contractor. For

example, a contract with a worker generally can provide that the worker, despite being classified

as an employee, may not participate in any of employee benefit plans maintained by the

employer for its employees.

C. Identification of Employer

Multi-Party Arrangements. Sometimes more than one entity controls at least some aspects

of the employment relationship. For example, a leasing company might have the right to

determine the amount of wages and benefits that leased employees will receive, and to hire or

fire the employees, while the service-recipient might have the right to supervise their work on

a daily basis. In such a situation it might not be clear which entity is the employee's common

law employer.

The exact identity of the common law employer generally is irrelevant for employment

tax purposes, since the entity that controls the payment of wages to the employee can be treated

as the employer for employment tax purposes even if it controls no other aspect of the

employment relationship. However, the exact identity of the common law employer might

be important for income tax purposes. For example, only the common law employer of an

employee may provide him or her with benefits that are limited to employees, and entities that

are not common law employers are not subject to any nondiscrimination or other obligations

imposed on common law employers with respect to their employees.

Typically, the IRS tries to decide whether an entity involved in a multi-party employment

situation is an employer or a particular worker by determining whether that entity has enough

control over the worker for the worker to be considered its employee under the 20-factor or

other test. This analysis has obvious limitations, however, where no single party has enough

control clearly to satisfy that test.

Under the common law, two or more entities may be treated as an employee's "joint

employer" if they share control over the employee. The IRS has recognized that, because

the rule is based on the common law, it applies for employment tax purposes. Since the

common law also applies for purposes of the employee benefit provisions of the Code, the rule

presumably applies in that context, as well. However, in practice the IRS has not been inclined

to apply it in either context.

The Code contains a few special rules for dealing with multi-p any arrangements. For

example, section 414(n) provides that a leased employee who has worked for a service-recipient

on a substantially foil-time basis for at least a year may be allowed to participate in the service

recipient's employee benefit plans as a common law employee and must be considered an

employee in determining whether those plans discriminate in favor of highly compensated

employees, but only if the service-recipient exercises "primary direction or control" over the

employee. Section 3506 provides that a sitter-referral agency will not be treated as the

employer of the sitter.

Affiliated Entities. Sometimes an employer is affiliated with other entities. If so, it

might not be clear whether the affiliate is part of the employer, with the same rights and

responsibilities towards employees of the employer as the employer itself, or instead is a

separate entity. Entities that are legally separate, such as separate corporations, are not

aggregated for employment tax purposes regardless of their degree of affiliation. However, if

a group of related entities pays wages through a single member of the group-the "common

paymaster"-that member may be treated as the employer of all of the entities' employees for

employment tax purposes. Affiliated entities are aggregated for certain income tax purposes.

Of particular importance, corporations that are part of a "controlled group" of corporations,

entities under "common control" and "affiliated service groups" are treated as parts of the same

employer for certain employee benefit purposes.

III. OTHER LAWS

B. Differences in Treatment

1. Federal Labor Laws

Most federal labor laws apply only or primarily to employees.

ADA (Title I). Title I of the Americans with Disabilities Act ("ADA") generally

prohibits an employer with 15 or more employees from discriminating on the basis of disability

with respect to the terms, conditions and privileges of employment, including the provision of

employee benefits. Independent contractors are not covered by this prohibition. However,

in appropriate circumstances they might be covered by prohibitions found in other titles of ADA.

ADEA. The Age Discrimination in Employment Act ("ADEA") generally prohibits an

employer with 20 or more employees from discriminating on the basis of age with respect to the

terms, conditions and privileges of employment, including the provision of employee benefits.

Independent contractors are not covered by this prohibition.

COBRA. The Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA")

amended the Code and ERISA generally to require a group health plan maintained by an

employer with 20 or more employees to give covered employees and their beneficiaries the right

to continue coverage under the plan after their coverage has ceased, if coverage ceases on

account of certain qualifying events. This requirement applies to employees and independent

contractors, provided that plan covers at least some common law employees.

ERISA (Title I). Employee pension and welfare benefit plans are subject to various

coverage, funding, fiduciary, reporting, and other requirements under Title I of ERISA. Title

I does not apply to plans benefitting only nonemployees, and many of the specific requirements

of Title I extend only to employee-participants. It is not clear at this time to what extent Title

I applies to a plan benefitting independent contractors if the plan also covers at least some

common law employees.

Because plan coverage typically is limited to employees, an employer's unilateral

reclassification of an employee as an independent contractor, or discharge followed by rehire as

an independent contractor (e.g., outsourcing), can under some circumstances be viewed as a

violation of Section 510 of ERISA, which prohibits any person from discharging or discriminating against a participant "for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan" or ERISA.

FMLA. The Family and Medical Leave Act ("FMLA") generally requires an employer

with 50 or more employees to allow employees to take up to 12 weeks of unpaid leave (with the

right to reinstatement) for certain family and/or medical purposes. Independent contractors need

not be allowed to take such leave.

Medicare (secondary payor rules). The Social Security Act generally provides that

Medicare is the secondary payor of benefits provided to an individual by a group health plan of

an employer that has at least 20 employees by virtue of the individual's current employment

status. Thus, this rule generally does not apply to coverage provided to an independent

contractor.

WARN Act. The Worker Adjustment and Retraining Notification (" WARN ") Act requires

an employer that employs 100 or more employees to notify employees affected by a plant closing

or their union representatives at least 60 days before the closing occurs. Independent contractors

are not required to receive such notice.

Other Labor Laws. Independent contractors generally are not covered by the National

Labor Relations Act ("NLRA"), and therefore generally may not engage in collective bargaining

or similar protected activities. They also receive no protection under the nondiscrimination

requirements of the Equal Pay Act ("EPA") or Title VII of the Civil Rights Act of 1964,

the safety requirements of the Occupational Safety and Health Act ("OSHA") or the minimum

wage and overtime requirements of the Fair Labor Standards Act ("FLSA"). Independent

contractors who leave to perform military service are not entitled to reemployment or seniority

rights under the Uniformed Services Employment and Reemployment Rights Act of 1994

("USERRA"). Furthermore, employers are not subject to penalties under the Immigration

Reform and Control Act ("IRCA") with respect to the receipt of services from independent

contractors.

Unlike the income and employment tax provisions of the Code, no laws comparable to

the laws described above apply to independent contractors. For example, while independent

contractors are not subject to FICA taxes, they are subject to roughly the same level of SECA

taxes. By contrast, if a worker is classified as an independent contractor under a federal law

prohibiting a particular form of discrimination, he generally has no protection from that form

of discrimination under federal law.

2. Federal Patent and Copyright Laws

An employer generally is considered the author of any work prepared during the course

of an employee's employment for purposes of the federal copyright laws; no such presumption

exists with respect to work prepared by independent contractors. By contrast, generally no

legal distinction is drawn between employees and independent contractors under the federal

patent laws. In practice, however, independent contractors might find it somewhat easier to

secure patent protection for on-the-job creations than employees, since this issue often turns on

a court's analysis of the implicit bargain struck between the parties.

3. State Labor Laws

Many state laws also impose different requirements on employers and employees on the

one hand and independent contractors and their clients on the other. In particular, employers

generally are required to contribute a portion of the wages paid to each of their employees to

state workers' compensation and unemployment funds. Clients of independent contractors

generally are not required to do so, and, as a consequence, independent contractors generally

are not eligible for benefits under these systems. Employee wages also might be protected under

state wage payment laws, while payments to independent contractors are not. To the extent

that employers' right to discharge employees at will has been limited, the limits apply solely to

employees.

B. Determination of Employment Status

In Nationwide Mutual Ins. Co. v. Darden, the Supreme Court held that, when a statute

uses the term "employee" without defining it, Congress is presumed to have intended to apply

the common law test. Many of the federal labor laws discussed above do not contain useful

definitions of the term "employee." Thus, employment status under those laws-include Title

I of ADA, ADEA, COBRA, Title I of ERISA, the Medicare secondary payor rules,

NLRA, USERRA and Title V11-is determined using the common law test.

That has not always been true. Before Darden, agencies and courts were more inclined

to apply a version of the economic reality test adopted by the Supreme Court in 1947 and

subsequently rejected by Congress in the Gearhart Resolution. Moreover, in applying that test

for purposes of a particular law, they tended to focus on whether the worker was a potential

victim of the "wrong" being "righted" by that law, This resulted in a test that was result-driven

and even more complex and subjective than the common law test.

The economic reality test continues to apply where it is required or authorized by statute,

including FMLA, EPA and FLSA. Many state workers' compensation and unemployment

insurance statutes also apply (or are interpreted by the courts or the agencies responsible for

interpreting them to apply) definitions that are more expansive than the common law.

Even in contexts where it applies, the common law test is taking a while to sink in. For

example, the IRS Training Materials issued last spring list financial control as a factor to be

taken into account in determining whether a worker is an employee. However, they carefully

note that:

The question to be asked is whether the recipient has the right to direct and

control business-related means and details of the worker's performance. The

question is not whether the worker is economically dependent on or independent

of the business for which the services are performed. This analysis has been

rejected by Congress and the Supreme Court as a basis for determining worker

classification. . . . As a result, a worker's economic status is inappropriate for

use in analyzing worker status.

By contrast, the EEOC Enforcement Guidance on Contingent Workers issued last fall lists a

service-recipient's control over how a worker performs his job as only one of many factors to

be taken into account in making that determination.

Relevance of Contract. Language in a contract is not dispositive in determining whether

a worker is an employee or independent contractor for labor law purposes. Nevertheless, a

contract might be relevant in making that determination to the extent it provides evidence of the

parties' intent, the extent to which the service-recipient can control and direct the worker, and

other factors taken into account in making that determination.

A contract also can be used to clarify the effect of a worker's status as an employee or

independent contractor. For example, ERISA generally limits participation in an employee

benefit plan to employees. However, it does not require an employee benefit plan to cover all

employees of an employer. Thus, a contract with a worker generally can provide that the

worker, despite being classified as an employee, may not participate in any of the employee

benefit plans maintained by the employer for its employees. A worker generally also can

waive his right to recover under a particular labor law if the waiver is knowing and voluntary

and is not prospective.

Relevance of Tax Treatment. The employment status of a worker for tax purposes is

relevant in determining his status for labor law purposes, at least to the extent that his status is

based on the common law test, which applies in both contexts. To the extent that his employment status for tax purposes is based on section 530 or some other tax-specific rule, it has little,

if any, relevance.

C. Identification of Employer

Most federal labor laws apply only to employers and only with respect to their own

employees. There are some exceptions. However, they generally are limited in scope.

Multi-Party Arrangements and Affiliated Entities. The same problem of identifying the

employer that arises under the Code arises under most federal labor laws. To resolve this

problem, agencies and courts use some of the same rules that apply for purposes of the Code,

although they derive them from different sources.

Most but not all of the aggregation rules that apply for purposes of the employee benefit

provisions of the Code also apply for purposes of COBRA, Titles I and IV of ERISA, and the

Medicare secondary payor rules. Other labor laws contain no specific aggregation rules.

Instead, agencies and courts interpreting those laws use the common law "single employer" rule.

That rule treats two or more entities as a single employer if they are closely integrated based on

all of the facts and circumstances.

As noted above, under the common law two or more entities may be treated as an

employee's "joint employer" if they share control over the employee. Although this rule applies

for federal tax purposes, it has been used very little in that context. By contrast, agencies and

courts interpreting federal labor laws frequently use the rule in multi-party situations to treat the

leasing company or broker and its client as employers of an employee, and therefore accountable

for any violations of those laws involving the employee, whether or not they are directly

responsible for the violations.

Finally, the EEOC and some courts aggressively interpret some labor laws to apply to

employers with respect to individuals employed by other entities, if they employ the requisite

number of employees to be considered "employers" under those laws and exercise control over

one or more aspects of the employees' employment. The EEOC refers to this interpretation

as the "third party interference" doctrine, and uses it and the joint employer rule to conclude

that, in most circumstances, a leasing company or broker is accountable for violations of federal

labor laws perpetrated by its clients, and vice versa.