Legal Perspective

Project Manager-Employee or Independent Contractor?
By Nancy S. Flury and Todd J. Guerrero | November 10, 2006
Biodiesel project founders and initial board members are confronted early on with the issue of who is going to manage the project. After all, most board members are passive investors or independent altogether. While they oversee development and implementation of the business plan, as well as raising capital, initial directors are not necessarily involved (nor should they be) in the day-to-day operations. Undertaking a biodiesel project is a daunting task that requires competent and dedicated personnel, who will essentially "live" the project during its start-up phase. An important question that the project founders and board must consider is whether to hire a project manager as an employee of the start-up business or as an independent contractor -at least through fundraising and initial commercial operation.

Hiring an independent contractor, or classifying an employee as such, may save the company money and may also create a more flexible situation than hiring an employee to perform the same work. As the biodiesel company gets off the ground, it will need someone with broad knowledge and project management skills. It is important, however, that workers are properly classified as employees, or independent contractors, because a number of state and federal employment and tax laws govern an employer's legal obligations depending on this classification.

Some of the legal obligations that employers face with respect to employees, but not independent contractors, include:

--Federal income tax withholding

--Federal Insurance Contributions Act (FICA) tax withholding for employees and payment of the employer portion of FICA

--Payment of federal and state unemployment taxes

--Mandatory overtime and minimum wages

--Payment of premiums required under state workers' compensation laws

--Guaranteeing protections under the Employee Retirement Income Security Act, the Labor Management Relations Act, Title VII and the Americans with Disabilities Act

Employers can be subject to penalties, often harsh, if employees are misclassified as independent contractors. Historically, the Internal Revenue Service (IRS) has used a "20-factor test" to determine the status of workers. The IRS recently changed its approach to determining worker classification by looking at how the worker performs the task for which he or she is engaged, how the business aspects of the worker's activities are conducted and how the parties perceive their relationship.

Factors that the IRS considers important indicators of employee-versus-independent-contractor status include:

--Fixed hours of work-Independent contractors set their own work hours, while employees' hours are determined by the employer.

--Use of assistants-An independent contractor hires, directs and pays for his or her own assistants, and supplies his or her own materials.

--Payment of expenses-If an employer pays expenses directly (as opposed to the worker seeking reimbursement of expenses), this typically means the worker has the right to regulate and direct business activities, indicating employee status.

--Right to discharge-If the employee can discharge the worker at any given time, this suggests employee status. An independent contractor can't be dismissed (without legal liability) unless the contract specifications are not met.

--Right to quit-An independent contractor may be liable for failure to perform according to contractual terms, while an employee may quit at any time without liability.

While not all of the factors indicated above must be present in any given situation and no single factor is controlling, they can serve as a guideline as the new company defines the project-manager role.

Nancy Flury and Todd Guerrero are partners in the law firm Lindquist & Vennum PLLP, a leading provider of legal assistance on renewable energy projects across the United States. Flury limits her practice to employment-related issues. Guerrero is a member of the firm's Agribusiness & Energy Group, and works with biodiesel clients throughout the country. For more information, visit or call (612) 371-3211.

Note: This article is only a general summary for informational purposes and does not constitute legal advice. Consult a qualified and experienced legal advisor for your specific situation or particular questions.
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