Can A Business Avoid Liability By Calling its Employees “Independent Contractors?”
By Craig Knapp on September 8, 2019

No. BUT – this is a trick question. There is no such thing as an “employee” who is also an “independent contractor.” It is one or the other.

If someone is truly an “employee” acting within the course and scope of employment when they cause an injury to an innocent third party, then the employer is financially responsible for that employee’s negligent harmful conduct.

On the other hand, if that worker is a true “independent contractor,” then the employer would not be financially responsible for the worker’s conduct.

What About “1099 Employees”?

Some employers call certain workers, whom they hire, “1099 employees.” But the 1099 tax form is for “independent contractors.” This is as opposed to the standard W2, which is meant for true employees.

This means that the commonly used term, “1099 employee,” is an oxymoron. Either someone is an employee or they are an independent contractor. A worker cannot be both.

If someone is truly a 1099 worker or independent contractor, that usually means that they are freelancers, working their own schedule financed by their own resources. They tend not to have an ongoing obligation to the employer that retains their services, beyond the job for which they are so-retained.

If a true 1099 worker causes a car crash while “on the job,” injuring some innocent third party, then the employer may have an absolute defense to any lawsuit filed against it. The employer would likely be successful in arguing, “he was not my employee. So, I cannot be held liable or financially responsible for his conduct.”

Taking a Step Back – What is Liability and Why is this Important?

When we speak of “liability,” we mean “financial responsibility.” An employer might try to reduce its exposure to liability by labeling some employees as “independent contractors.” These individuals might even sign contracts that purport to define themselves as “independent contractors.”

The employer might then rely on this “independent contractor” designation of its employees to avoid tax withholding responsibilities (e.g., payroll taxes), reduce worker’s compensation costs, and reduce commercial liability insurance costs.

Then, if and when such an “independent contractor” causes an auto collision on the job, the employer might say to the victim, “you cannot sue me. He is not my employee. You will have to sue the employee individually. Oh, and good luck collecting what is owed to you from that individual, as opposed to my business with its commercial liability insurance policy of $1 million.”

If this tactic works, then the employer would either be able to avoid lawsuits altogether. At the very least, the employer’s commercial liability insurance company could have a defense at the outset to any lawsuits actually filed. This might reduce the employer’s premiums for its commercial liability policy, or minimize the employer’s liability exposure in excess of its insurance policy limit.

When Does an “Independent Contractor” Become an “Employee” in Arizona?

It all comes down to the degree of control the employer has over the person whom it hires.

Consider: When you call a cable repairman, how much control do you have over that worker? Over when he shows up to your house? About how he goes about his work? Concerning what tools he uses on the job? The answer: very little, if any at all. So, it would be unfair to hold you, the customer, financially responsible for any harm the repairman causes in the course of his work, like if he accidentally bangs a hole through your shared wall into your neighbor’s living space. This is because, in relation to you, the cable repairman is truly an independent contractor. You may have retained his services, but you are not his employer.

On the other hand, suppose you run a business. You direct one of your employees to fix the cable connection by fiddling with the wiring. Your employee accidentally short-circuits the entire system, causing data loss to your server. This results in the loss of critically important private data for your customers. If your customers sue, you, the employer, are financially responsible. After all, this was a true employee acting within the course and scope of employment.

So, what does the phrase, “course and scope of employment,” mean? It means, during that period when the negligent act occurred, the employer had a right to control, or actually did control, the employee’s actions. The employee is, in essence, “on the clock.” The employee is therefore subject to the employer’s directions.

Ultimately, the “employee” vs. “independent contractor” distinction in Arizona comes down to this question of control. It does not matter much how an employer might attempt to define its relationship with its workers in a contract. Instead, all that matters is the question, “how much control does the employer have over the worker?” If the answer boils down to, “a significant amount,” then it is likely that the employer could be found responsible for the worker’s negligently-caused harm to an innocent third party.

That Murky Gray Area

The question may become difficult or unclear when the employer does everything it can to try to make the relationship seem like an “independent contractor” situation, yet wants to retain control over the details or specifics of the work. As they say, you cannot have your cake and eat it too. Or as Spiderman says, “With great power comes great responsibility.” If an employer wants the power of control, with it too must come legal and financial responsibility.

Let’s suppose that, while carting materials back and forth on a job for an employer, a worker causes an auto collision, injuring an innocent third party. That innocent third party sues the worker and the employer. The employer might assert an “independent contractor” defense. It could present the contract it wrote between itself and the worker as evidence of this relationship. The employer might file a motion to dismiss the case on this basis.

In deciding whether to dismiss the case, the Court would look to whether that worker was required to comply with instructions about when, where, and how to work. The Court may examine the degree of supervision the employer exercised over the worker, how the worker represented himself to customers, whether this was an isolated job or an ongoing business relationship, and whether the worker financed his own work or whether his necessary work materials were provided by the employer.

Upon reviewing all of this evidence, if the Court finds that a reasonable juror could believe that the worker was actually an employee, then the Court will deny the employer’s motion to dismiss. The Court will instead allow a jury to make that factual determination at trial.

So, an employer can try to call its employees “independent contractors.” But this designation may not survive scrutiny by a court, if and when something goes wrong giving rise to litigation. From the employer’s standpoint, the upside of such a designation of “independent contractor,” would be for plausible deniability. It could serve as a smokescreen that might deter potential lawsuits. Or it could provide a basis for a defense once such a lawsuit is filed. But any skilled Arizona lawyer would know how to attack this defense, and defeat it.

Thus, employers cannot avoid liability for their true employees by calling them “independent contractors.” That is, so long as the lawyer on the other side of the case is unrelenting and knowledgeable about the law.