Employee or Independent Contractor? Here's how to determine which type of worker you have and whether you're liable for their actions.

Whether a person working for you is your employee or an independent contractor has one very important legal consequence: liability. Say you hire a company to paint your real estate office. During the work, a painter falls off a ladder breaks his arm. Falling paint damages computers that weren't properly covered. Are you liable for the damages?

The general rule is that an employer is legally responsible for the negligence of his or her employees, but not for the negligence of an independent contractor. As with most broad legal principles, there are many exceptions. However, the general rule applies in most common circumstances.

So what are the differences between an employee and an independent contractor? There are a number of factors that determine which category a worker falls into. The most important of these is called the right of control. Does the employer have the right to exercise control over the worker? Basically, this means that the employer has the right to hire and fire the worker. But it also means the employer has the right to dictate both the means and the manner in which the worker performs the job. If this is the case, then the relationship is that of an employer and an employee. However, if the employer can control only the final results of the work, then the parties have an employer-independent contractor relationship.

Other factors that determine the nature of the relationship between an employer and a worker include:

• whether the worker is engaged in a distinct occupation or business
• whether the employer performs any required supervision
• how much skill the work requires
• who supplies the tools and equipment necessary for the work
• the length of time needed to perform the job
• whether payment is based on time or by the job
• whether the work is part of the regular business of the employer
• whether the parties believe they are employer and employee

How do these factors apply to our example? As owner of the real estate office being painted, you employed the painting company to do the work. However, you can't hire or fire the employees of the painting company--including the one who fell off the ladder. You can control the final results of the work, such as the color of the paint used. However, you can't dictate how the painters do the actual painting, and you don't provide the paint, brushes, ladders, drop cloths and other needed materials.

Painting like this is usually skilled work done by a painting company. Your business is real estate, and you aren't supervising the painters' work. The job is for a limited period of time, perhaps a few days or more depending on the size of your office. You pay by the job and not by how long the job takes. Clearly, you don't believe the painters are your employees. So in this case, there would be no dispute that all damages caused by the falling painter will be the liability of the independent contractor.