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Employee vs. Independent Contractor in South Dakota

By Charlie Larson, Boyce Law Firm

The issue of independent contractor versus employer has beenlitigatedinSouthDakota.Thereisapresumptionthat the worker was an employee and it is the employer’s burden to establish the worker is an independent contractor. The Department of Labor and the South Dakota Supreme Court have provided a set of factors to consider when determining whether a worker is an independent contractor or an employee.

The following factors have been used by the Department of Labor as considerations when determining whether a worker is an independent contractor or employee:

1. The extent of control which, by the agreement, the master may exercise over the details of the work;

2. One must look at whether the employer has the ability to hire, fire, and lay off the worker. It is also important how much control the master has over the workers’functions.

3. Whether the one employee is engaged in a distinct occupation or business.

Here, it is important to see whether the worker operated a separatebusinessorunderaseparatetradename.Itisalso important whether the worker worked solely for this master, on a full time basis.

4. The kind of occupation with reference to, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision.

5. The skill required for that particular occupation. 6. Whether the employer or the workman supplies theinstrumentalities,tools,andtheplaceofwork Here,

“ when the employer furnishes valuable equipment, the relationship is almost invariably that of employment. ” See Larson onWorker’s Compensation §44.43(a).

7. The length of time for which the person is employed.

8. Themethodofpayment,whetherbythejoborby the hour.

9. Whether the work is part of the regular business of the employer.

10. Whether the parties believe they are creating the relationship of master and servant.

The South Dakota Supreme Court has essentially adopted these factors although it has grouped certain factors into a two-part test. In Egemo v. Flores, 470 NW2d 817 (SD 1991)theemployerarguedtheservantwasanindependent contractor. The court noted there was an important distinction as an independent contractor is not covered by workers’ compensation. The court stated there is a two factor test: (1) whether the individual has been and will continue to be free from control or direction over the performanceoftheservices,bothundercontractorservice and fact, and (2) whether the individual is customarily engaged in an independently established trade, occupation, profession or business.

In evaluating the “right of control test” the important considerations include direct evidence of the right of control,themethodofpayment,furnishingmajoritemsof equipment, and the right to terminate the employment relationship at will and without liability. In Egemo, the court noted the employer did not exercise control or supervision over the method or manner in which the servant completed his task. Furthermore, the master did not direct the hours of work, breaks, or even the days off. The court also noted the servant did not withhold any amountsforincometax,socialsecurity,orunemployment insurance.The employer also filed a Form 1099 as a nonemployeecompensationform.Thecourtnotedtheservant was required to supply all of his own tools, and his own maintenance and transportation to the work sites. Furthermore, the employment relationship could not be terminated without liability.

The significant considerations in the test of “independently established trade” are that: The requirement that the employee’s occupation be independently established and that he be customarily engaged and it calls for an enterprise created and existing separateandapartfromtherelationshipwiththeparticular

employer;anenterprisethatwillsurvivethedetermination ofthatrelationship.Theindividualmusthaveaproprietary interest in the enterprise to the extent that he can operate without hindrance from any other individual. However,itisnotskillalonewhichdetermineswhetheran individualisestablishedinatradeorbusiness,butwhether that individual by reason of such skill engages himself in an economic enterprise such that he bears the risk of his own unemployment. Whether or not he is unemployed is solelyafunctionofmarketforcesandademandforskills, not the response of his master to similar economic realities.

The South Dakota legislature has also addressed this issue and stated the difference between an employer and an independent contractor in SDCL 61-1-11. That statute states “service performed by an individual for wages is employmentsubjecttothistitleunlessanduntilitisshown to the satisfaction of the Department of Labor that: (1) the individual has and will continue to be free from control or direction over the performance of the service, both under hiscontractofserviceandinfact;and(2)theindividualis customarily engaged in an independently established trade, occupation, profession, or business. The South Dakota legislature defined employee in SDCL 62-1-3 for the purposes of worker’s compensation. The definition is roughly the same as that set forth above.