Employee or Independent Contractor? A Closer Look at the Four-Factor Model

Employee or Independent Contractor? A Closer Look at the Four-Factor Model

How do you know whether a worker in South Carolina should be classified as an employee or an independent contractor? The decision has big consequences for both employer and worker, as that classification impacts taxes, workers’ compensation, and more.

While the IRS has its own standard for determining whether a worker should receive a 1099 or a W-2 (which you can read about in this blog), right now we’ll focus on how the State of South Carolina approaches this question.

The Four-Factor Model to Determine Employment Status

For many decades, South Carolina courts have used what is called the four-factor model or four-factor test to determine whether a worker should be considered an employee or an independent contractor.

The four factors are:

1. The right or exercise of control;
2. Furnishing of equipment;
3. Method of payment; and
4. The right to fire.

Let’s look a closer look at all four.

The right or exercise of control. When an employer controls or directs the worker – or has the right to, even if that right is not exercised – that denotes an employer-employee relationship. An employee is told when to do their job, how to do it, and is typically supervised to some degree. In contrast, an independent contractor decides their own hours, determines how to do their work, and works without supervision.

Furnishing of equipment. When equipment is furnished by the employer to the worker to complete their job, that’s evidence in favor of an employee classification. An employee uses, for example, the computer and desk, or truck and tools, of the employer at the employer’s expense. An independent contractor uses their own materials and tools at their own expense.

Method of payment. Time-based payment tends to show an employee relationship while project-based payment tends to show an independent contractor relationship.

Right to fire. South Carolina is an at-will employment state meaning that an employer can fire an employee and end the relationship immediately with no further obligations or liabilities (assuming the termination was not unlawful). In contrast, many independent contracts include clauses in their contracts that require full or partial payment if a job is terminated unexpectedly before its conclusion.

When determining the status of a worker, no single factor is determinative, and South Carolina courts weigh all the evidence to come to a conclusion. The examples above are as black-and-white as possible, but when these types of cases reach the Court of Appeals or the Supreme Court of South Carolina, they are never as clear cut.

The Four-Factor Model Put to the Test in Ramirez v May River Roofing, Inc.

A case heard in the South Carolina Court of Appeals in November 2020, Ramirez v May River Roofing, Inc. (read the opinion here), shows the four-factor model in action and how SC courts approach the issue of determining a worker’s classification.

The Background

Francisco Cedano Ramirez started a business as a sole proprietor called Cedano Roofing. About a year later, he began working for a company called May River Roofing, Inc., and he worked “continuously and exclusively” with them for approximately three years.

In January 2016, Ramirez was on a roofing job when he fell to the ground, a fall of about 16 feet, and sustained “significant injuries to his back, neck, shoulders, chest, ribs, lungs, and upper extremities” as a result.

The Claims

Ramirez filed a claim for workers’ compensation on the basis that he was May River’s direct or statutory employee.

The Single Commissioner at the SC Workers’ Compensation Commission determined that Ramirez was neither a direct employee nor a statutory employee of May River, but an independent contractor, and therefore was not eligible for workers’ compensation benefits. Ramirez appealed and an appellate panel affirmed the decision.

This appeal followed in which the SC Court of Appeals looked at the evidence de novo to come to its own conclusion about whether Ramirez was an employee of May River and thus eligible for workers’ comp benefits.

Weighing the Evidence to Determine Employee or Independent Contractor Classification

Statutory employee: A statutory employee is worker whose income is treated as if they’re an independent contractor but whose taxes are treated as if they’re an employee. In South Carolina, “settled law commands” a sole proprietor may not be considered a statutory employee, so Ramirez’s claim that he was a statutory employee of May River was denied.

Direct employee: Here the court spends time looking at the evidence using the four-factor model.

1. Right or Exercise of Control

Factors in favor of independent contractor classification:

• Ramirez had “a great deal of autonomy”
• Ramirez set his own schedule
• Ramirez did not punch a time clock
• Ramirez was free to negotiate for additional payment or decline the job
• Ramirez was free to hire additional help on a job without approval from May River

Factors in favor of employee classification:

• Ramirez was required to wear a May River branded t-shirt at the jobsite
• Ramirez was required to display a magnetic May River decal on his truck
• Ramirez worked exclusively with May River for three years, which suggested to the court that May River had the right to control Ramirez by withholding work

There was also conflicting testimony about the level of supervision, so that was not considered as a factor in favor of either party.

The court acknowledges that May River’s control over Ramirez’s appearance and their exclusive working relationship might seem “trivial” but thinks they are not. It concluded that May River’s control over Ramirez was more than that of a typical employer-independent contractor relationship and concluded that this factor weighed in favor of an employee relationship.

2. Furnishing Equipment

Factors in favor of independent contractor classification:

• Ramirez provided his own tools
• Ramirez provided his own vehicle

Factors in favor of employee classification:

• May River provided Ramirez with all the materials used in the roofing jobs
• May River gave Ramirez a branded t-shirt and magnetic truck decal he was required to display

The court concluded that May River furnishing all the materials at its own expense showed “direct evidence of control” over Ramirez and found that this factor also weighed in favor of employee classification.

3. Method of Payment

Factors in favor of independent contractor classification:

• Ramirez was paid “per roofing square” for roofing work (the majority of the work he did)

Factors in favor of employee classification:

• Ramirez was paid by the hour for repair work (a minority of the work he did)

Because the majority of Ramirez’s work was paid on a project or piecemeal basis and his payment did not depend on the amount of time he spent working, the court concluded that this favored an independent contractor relationship.

4. Right to Fire

The court did not find any evidence that weighed in favor of either party.

Conclusion: Employee Relationship

The evidence in this case was a mix of factors in favor of both employee relationship and independent contractor relationship. However, after considering all the evidence the court concluded that May River and Ramirez did have an employer-employee relationship, meaning that Ramirez was eligible for workers’ compensation benefits.

Employers Take Note – South Carolina Courts Favor the Employee Classification

Even though Ramirez set his own schedule, had freedom to negotiate payment, could hire help without approval, was paid per roofing square the majority of the time, and used his own vehicle and tools, the SC Court of Appeals still found that the relationship he had with May River constituted an employer-employee relationship.

This reflects the tendency of South Carolina courts to strongly favor the employee classification over the independent contractor classification when it comes to cases involving benefits for injured workers. “The general rule is that workers’ compensation law is to be liberally construed in favor of coverage in order to serve the beneficent purpose of the [Workers’ Compensation] Act; only exceptions and restrictions on coverage are to be strictly construed,” the SC Court of Appeals states in this opinion. While this has long been a general rule, this bias towards employee classification has been even stronger since the Lewis v L. B. Dynasty (2015) case (covered briefly in the 1099/W-2 blog).

If you’re an employer, keep this in mind when hiring and classifying workers. You must treat independent contractors like independent contractors. Seemingly small things, like asking your worker to wear a branded t-shirt, can become evidence of an employer-employee relationship, as seen in this case. Otherwise, hire the worker as an employee so they have the protections they’re entitled to under South Carolina law.

Business Law and Strategic Advice

For help with starting, running, or ending a business, call attorney Gem McDowell of the Gem McDowell Law Group. He and his team help business owners in the Charleston area and across South Carolina with forming LCCs and corporations, drafting corporate governance documents like buy-sell agreements, handling commercial real estate transactions, and more. Gem is also a problem solver who can give you strategic advice so you can avoid problems and protect yourself and your assets. Call him at his Mt. Pleasant office today at 843-284-1021 to schedule a free consultation.