Distinguishing Household Employees from Contracted Service Providers

Estate Managers are often responsible for engaging, supervising, and paying the people who provide services within a private residence. Correctly identifying each worker as a household employee or contracted service provider affects a wide range of obligations and responsibilities including payroll, taxes, employment law, and insurance coverage. It’s important to know how to evaluate those relationships based on how they function in practice and what is recognized by labor laws, particularly when employees and contractors perform similar work under similar household expectations.

An employee housekeeper and a contracted housekeeper may clean the same rooms, arrive on the same schedule, use the same products, follow the same procedures, and meet the same service standards. Household managers may give both workers detailed instructions and evaluate the service provided. From a high view, there is little difference.

Classification cannot be determined from the work performed or the amount of household direction alone. The household manager must evaluate the complete relationship surrounding the work. The central distinction is whether the household has hired and manages an individual as a member of its staff or purchases services from an independently operated business or contractor. That determination requires examining behavioral control, financial control, and the relationship between the parties.

The Three Possible Relationships

Household services generally involve one of three working structures:

• A household directly employs an individual
• A self-employed individual provides services as an independent contractor
• A service company assigns its own employee or worker to the household

A Direct Household Employee

A household employee works within a position established by the household. The household generally recruits the person, establishes compensation, assigns duties, manages working hours and leave, evaluates performance, pays wages, handles employment reporting, and retains disciplinary and termination authority.

An Independent Contractor

An independent contractor performs services as a self-managed entity. The provider manages the commercial and financial responsibilities associated with the work, including pricing, expenses, customer commitments, insurance, and the risk of profit or loss.

Because the household deals directly with the person performing the work, this arrangement requires careful review. Business registration, invoices, insurance, and a service agreement support the classification. If they have not incorporated, this relationship could be viewed as an employee relationship that is avoiding regulation and taxation.

A Worker Supplied by a Service Company

A service company contracts with the household and assigns a worker to perform the service. The company may hire, pay, train, insure, supervise, discipline, and replace that worker. The household may provide extensive property-specific instructions, but the company remains responsible for the employment relationship and service delivery and the service provider.

IRS Classification 

Federal employment-tax classification and federal wage-and-hour classification involve separate legal standards. The IRS uses the common-law framework of behavioral control, financial control, and the parties’ relationship. Every relevant fact must be considered. The significance of each fact depends on the circumstances, and no fixed number of factors determines the result.

Behavioral Control

Behavioral control examines the household’s right to direct the individual and the performance of the work. In a private home, this isn’t usually going to be the determining factor, as the standards set by the house may apply to everyone working in the home.

Relevant evidence of behavior control includes:

• The type and detail of instructions provided
• Who establishes the worker’s routine
• Who determines the sequence of duties
• Who trains the worker
• Who evaluates the worker’s methods
• Who requires or manages corrections
• Whether the household can assign duties beyond the agreed service
• Whether the worker requires permission to change procedures
• Whether the household manages the individual or communicates with the business responsible for the service

Greater evidence of employment appears when the household also:

• Trains the individual for an ongoing position
• Creates the person’s continuing work routine
• Changes the person’s duties as household needs arise
• Requires availability for additional assignments
• Approves personal leave or absences
• Conducts individual performances reviews
• Disciplines the individual
• Controls whether the individual remains in the position

The manager should identify the authority surrounding the instructions. In a staff relationship, the household manages the individual. In a contracted relationship, the household establishes service requirements while the provider retains responsibility for operating the business and managing the worker.

Financial Control

Financial control examines who manages the business and financial responsibilities associated with the service. Evidence of an independently operated business may include:

• Services marketed to the public
• Authority to negotiate prices and service terms
• Freedom to accept or decline engagements
• Investment in equipment, insurance, and business operations
• Repayment of operating expenses
• Responsibility for payroll and worker compensation
• Financial responsibility for correcting deficient work
• Business decisions that create an opportunity for profit or risk of loss

The Relationship Between the Parties

This category examines how the parties have structured and maintained the arrangement. This is the most telling of the consideration points.

Evidence of a household staff position may include:

• An ongoing position created by the household
• Compensation established by the household
• Integration into staff schedules and reporting lines
• Household-managed leave
• Employee benefits
• Direct performance management
• Household authority to discipline or dismiss the individual

Evidence of a contracted service may include:

• A defined scope of service
• Negotiated fees and service terms
• Provider responsibility for payroll and insurance
• Provider responsibility for training and performance
• Provider ability to substitute the service provider
• Financial responsibility for correcting deficient service
• Services offered to other customers
• A service agreement assigning the parties’ responsibilities

The Consequences of Misclassification

Treating an independent contractor or company-proved service person like an employee can define the legal character of the relationship. The consequences of getting this wrong depend on the type of provider. 

A company itself cannot become the household’s employee, but the household may become a joint employer of the company’s workers if it assumes control over their schedules, supervision, assignments, discipline, or other conditions of employment. Joint employment means that the service company and the household are both legally responsible for compliance with applicable employment laws. The household could therefore be held responsible for unpaid minimum wages or overtime, liquidated damages, the worker’s legal fees, and applicable civil penalties, even when it paid the service company’s invoices in full.

However, when the household engages an individual as an independent contractor but exercises the control associated with employment, the worker may be found to have been a household employee all along. The household may then be responsible for unpaid Social Security, Medicare and unemployment taxes, interest, and penalties for late filings and payments. Wage-and-hour claims may also require payment of unpaid minimum wages or overtime, liquidated damages equal to the unpaid wages, and the worker’s attorney fees. State law may add workers’ compensation premiums, unemployment contributions, statutory damages and other penalties. These liabilities can extend across the full period covered by the applicable statute of limitations.

Documentation is Essential

As worker classification is determined by the full working relationship, the household needs evidence of both how the engagement was structured and how it operated in practice. If the classification is questioned by a worker, taxing authority, labor agency or insurer, these records allow the household to demonstrate the basis for its classification and support its position with contemporaneous evidence.

For an individual contractor, a written independent contractor agreement documents the parties’ intent to create a commercial service relationship. Additional documentation could include a Form W-9, business registration where applicable, invoices, proof of insurance, negotiated fees, written scopes and change orders, and records showing that the contractor controlled scheduling, methods, expenses and acceptance of additional work.

For a service company, the file should include the contract with the company, its Form W-9, invoices issued and paid in the company’s name, certificates of general liability and workers’ compensation insurance, and confirmation that the company employs or engages the workers assigned to the property. Communications should also show that scheduling requests, performance concerns, substitutions and disciplinary matters went through the company’s designated representative. Together, these records establish that the household purchased services from the company and that the company retained responsibility for managing its workers.

Do it Right at the Beginning

An estate manager can protect the household and limit their liability by addressing classification before work begins. The file should contain a signed service agreement, Form W-9, invoices, proof of insurance, applicable licenses and evidence that the contractor operates a business. Daily practices should follow the agreement. Reassess the relationship whenever the schedule, duties, supervision or length of engagement changes.

If concerns arise, issues should be addressed by the household’s employment attorney, tax adviser and payroll provider before the engagement continues. For uncertain federal tax classifications, either the household or the worker may request an IRS determination using Form SS-8. The central protection is consistency among the classification decision, the written agreement and the way the relationship functions in the home.