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Townships of all sizes rely on workers to carry out basic governmental functions and keep the township running smoothly. Although larger townships may be able to fill out a full roster of township employees and officials on a full-time basis, most Michigan townships rely on a mix of workers, some full time and some less so.

Townships also commonly rely on independent contractors to perform certain functions, often believing that an independent contractor arrangement is less burdensome than hiring a township employee. Although that is true when properly done, independent-contractor status is reserved only for those workers who are sufficiently autonomous and who do not rely on the township in completing the work or making a living. A township cannot simply declare someone an independent contractor, even if the worker agrees. Further complicating matters, Michigan law requires certain township positions to be classified as employees – regardless of whether those workers might meet the criteria to be independent contractors.

Far from a trivial difference, there are serious legal ramifications for classifying a worker and potential liability for any misclassification.

I . Employees vs. Independent Contractors

Most townships utilize a mix of employees and independent contractors to get work done. What’s the difference?

Broadly speaking, employees are regular workers for the township for whom the township provides the necessary supervision, tools/equipment, facilities, and training. Generally (but not always), employees are permanent workers for the township and are not hired simply to complete an isolated task or project. Employees are paid via payroll, payroll taxes are taken from their paychecks (both an employee and employer portion), and employees are issued a Form W-2 at year’s end. Employees are often eligible for township benefits and afforded legal protections in employment.

On the other hand, independent contractors run their own businesses and operate with a great deal of autonomy. The township may give general instruction and directions, but independent contractors control the methods for completing their assignments. Contractors generally provide their own workforce, tools/equipment, and training. They are often hired for very specific tasks or special, limited-duration projects. Independent contractors are paid via accounts payable, are responsible for their own tax burden (i.e., no payroll taxes), and are issued a Form 1099 at year’s end. Independent contractors lack most of the legal protections that exist for employees and are not eligible for township benefits.

II. Why Does Classification Matter?

Many state and federal laws require “employers” to undertake obligations on behalf of their “employees,” such as:

• Workers’ Disability Compensation Act requires employers to provide workers’ compensation insurance for employees.
• Michigan Employment Security Act requires employers to make tax contributions to a trust fund from which employees receive unemployment benefits when they are involuntarily unemployed.
• Fair Labor Standards Act requires employers to pay nonexempt employees the minimum wage and overtime compensation.
• Anti-discrimination in employment statutes applies to employees and their protected-class status (although the Michigan Court of Appeals has applied state anti-discrimination law to an independent contractor in at least one instance).
• Internal Revenue Code requires employers to withhold a portion of an employee’s wages as taxes and also to make tax contributions on behalf of an employee.

These protections, however, do not apply to independent contractors. They are responsible for their own insurance, and are not entitled to unemployment, minimum wage, overtime, or the protections of anti-discrimination law in the employment context. Independent contractors are also responsible for their own tax burdens.

III. Benefits of Utilizing Independent Contractors

Because federal and state law have those additional requirements for employees and not for independent contractors, townships often prefer to utilize independent contractors to avoid costly obligations related to the requirements listed above. Townships also may avoid providing employee benefits that might otherwise be due to township employees but not to independent contractors. Because employees must be paid overtime and contractors need not be, utilizing contractors is also generally a more predictable cost to townships as the fees will be set forth in advance and will be unlikely to vary from week to week or month to month. Independent contractors also require less direct supervision to get work done. In total, the diminished costs and reduced hassle of using independent contractors are undeniably enticing.

IV. Tests to Determine Whether a Worker is an Employee or Independent Contractor

As we will discuss below, there are serious risks associated with properly classifying a worker. Therefore, it is extremely important to understand when someone may be classified as an independent contractor. Because independent contractors receive less legal protection than employees, employee-status is the default in classification. In other words, it is always safest to assume someone is an employee unless there is strong evidence that they may be classified as an independent contractor. Classification as an employee will never create legal liability. Misclassification as an independent contractor can absolutely create legal liability.

Proper classification goes well beyond the title that a worker is given or the designation that the parties agree to. Courts and government agencies in Michigan look to the following factors to determine proper classification:

• Department of Labor Six-Factor Test. The federal Department of Labor (“DOL”) revived a six-factor test that went into effect in January 2024. This test is utilized for employee claims made under federal wage and hour law. The DOL emphasizes that the core of the test is to determine whether the worker is “economically dependent on the employer for work” versus being “in business for themself.” No single factor is determinative. A majority of the factors weighing in one direction is also not necessarily determinative. Instead, each factor’s weight is determined on a case-by-case basis.

• • The Worker’s Opportunity for Profit or Loss. Independent contractors have the ability to make great profits or suffer great losses depending on the skill and efficiency of their work. If a worker has the opportunity to make profits or incur losses, that weighs in favor of independent contractor status. On the other hand, employees receive regular wages for the work they do. They have a reliable expectation that they will receive that pay regardless of other factors.
  • Investments by the Worker and Potential Employer. A worker who invests their own money in staffing, special equipment, computer software, marketing their own services, and other business expenses may be an independent contractor. Employees are generally not expected to invest their own resources in their work.
  • Degree of Permanence. Independent contractors are more likely to do work that is sporadic or project-based with certain end dates. Independent contractors generally offer their services to multiple clients often overlapping with one another. Employees often work for indefinite durations, are not hired for specific projects, and are more restricted in their ability to work for multiple employers at one time.
  • Nature and Degree of Control. Independent contractors receive general directives from the potential employer but usually control the execution of the project. Independent contractors also control their own staff (if they have staff). Employees are more directly supervised and are usually given explicit instructions on carrying out tasks. The employer controls more of the relationship and the work in an employee-employer relationship.
  • Work is an Integral Part of the Business. If the work is critical, necessary, or central to the employer’s business, it is more likely to be done by employees. For example (in the private sector), a cook in a restaurant performs work that is central to the business of the restaurant and will likely be an employee. An accountant for the same restaurant does not, and could be classified as an independent contractor depending on the circumstances.
  • Skill and Initiative. Independent contractors use highly specialized skills and their own business planning to perform the work and be successful. Employees are more likely to be generalists and to perform a variety of tasks. Employees are not expected to use their skills in conjunction with their business initiative to be successful.

• Rules to Live By (and Factors to Consider) When Classifying Workers

1. Behavioral Control
   • Hours of work. Independent contractors generally set their own schedules and have freedom to be flexible about when they work. Employees are more likely to have set schedules.
   • Hiring of assistants. Independent contractors often have their own staff. Employees do not.
   • Tools and equipment. Independent contractors usually supply their own tools and equipment. Employees are rarely expected to use their own tools or equipment to perform their work.
   • Training. If the work requires independent or professional training or experience, then the chances of making the independent contractor label stick are much greater. If you do not provide that training, the label is ever more likely to stick.
   • Instructions. Independent contractors work with limited supervision or specific instruction.
2. Financial Control
   • Significant Investment. Independent contractors have significant investments in their own tools and equipment.
   • Payment of expenses. Independent contractors pay their own business expenses. Employees are usually reimbursed if they incur any out-of-pocket costs.
   • Opportunity for profit or loss. Independent contractors have an opportunity to make a profit or to suffer monetary loss. Employees simply collect wages.
   • Making services available to the public. True independent contractors are in their own business. One would expect them, therefore, to make their services available to the public. Employees often work for one employer alone or are limited in their ability to offer services to the public more widely.
   • Method of payment. Payment per job or per unit of production is common for independent contractors. Payment by the hour or by set salary is common for employees.
3. Type of Relationship
   • Liability insurance and employee benefits. Independent contractors insure themselves and are not offered benefits. Employees are usually covered by employer insurance and may be eligible for employer benefits.
   • Permanency of the Relationship. Independent contractors are hired for specific projects while employees are hired indefinitely.
   • Services are Key Activity of the Operation. If someone does the work central to the operation of the employer, it is more likely that person is an employee.
   • Right to fire at will. If you have the right to fire at will, you have an employee.

V. Specific Township Workers

Despite those tests and any detailed analysis of the factors presented above, Michigan law and the interpretations from courts and government agencies, dictate that certain township positions must be employees, regardless of the results of any balancing test or list of factors. Below are some of the township positions that frequently present classification questions for Michigan townships:

Assessors

The classifying issue that most commonly impacts townships is for their assessors. Many of the factors discussed above would lead a township to believe they could hire an assessor as an independent contractor. However, an IRS interpretation suggests that assessors should be treated as township employees, at least for their statutory duties.

The IRS understands assessors to be “public officials” because (1) their position is created by a statute; (2) they are delegated a portion of the sovereign powers of government; (3) their powers and duties are defined by the legislature; (4) their duties are performed independently and without control of a superior power; (5) the office is permanent and continuous. The IRS treats “public officials” (at least for tax purposes) as “employees.” However, the IRS noted that assessors often work alongside “professional appraisers” and such appraisers are often properly classified as independent contractors.

While it is a somewhat close call, it is safest to treat assessors as employees at least as to their statutory duties. The statutory duties that must be completed by an employee are limited simply to supervising the preparation of the assessment roll and signing off on it. However, it is likely permissible to hire others (or the same person) to do the appraisal work that supports the assessor’s statutory duties. That hybrid approach limits liability by properly employing an assessor but allows the flexibility and other benefits of contractor relationships as to the majority of the work actually performed. As always, simply classifying all workers involved as employees is the simplest and most risk-adverse approach.

If you are interested in re-visiting the classification of your assessor, contact your township attorney to ensure all necessary steps are taken.

Building Officials

It was formerly a common practice for townships to utilize independent contractor arrangements for building officials. However, in 2012, the Michigan legislature amended the Construction Code Act to define “building official” as:

[A]n individual who is employed by a governmental subdivision and is charged with the administration and enforcement of the code and who is registered in compliance with article 10 of the skilled trades regulation act, MCL 339.6001 to 339.6023. This individual may also be an employee of a private organization. (emphasis added)

In 2015, the Michigan Attorney General provided an opinion (OAG No. 7285) interpreting that language to mean that a building official must be an employee of the municipality they serve. The Attorney General said that the Legislature’s use of the word “employed” could only mean that they intended for building officials to be employees.

Attorney General opinions are not binding authority and there are reasonable points to disagree with the interpretation. However, the Attorney General’s office has also taken an interest in pursuing worker misclassification, and therefore, adherence to the Attorney General’s opinion is the easiest way to avoid a potential misclassification. For that reason, it is safest to treat building officials as employees.

However, the statute also states that building officials “may also be an employee of a private organization.” The Attorney General interpreted that to mean that an independent contractor (perhaps even the same person employed as the building official) could perform duties that assist a township in the administration and enforcement of the State Construction Code.

Grounds Maintenance / Cemetery Sexton

Except for the specific examples above, many township positions can be filled by independent contractors unless the statute creating the position states or indicates that the position must be filled by an employee. For those positions without a clear answer in the law, townships should contact their legal counsel and engage in the analysis put forth in the tests above.

We frequently get requests about whether grounds maintenance staff or cemetery sextons may be independent contractors. For these positions, there is no law that provides us with an answer. Therefore, we default to the factors and tests above. Because these are fact-specific questions that are unique to each position and each township, there is no one-size-fits-all answer. However, in many cases, so long as the township does not seek to exercise tight control over the work and the worker, independent contractor arrangements can be a solution for townships.

VI. The Risks of Misclassification

With the obvious benefits of utilizing contractors, why wouldn’t townships simply classify everyone that way? Put simply, the “employee” is the default setting for a worker unless the employer can prove that an independent contractor arrangement is allowed and fits with the tests discussed above. If not, the worker could be misclassified and could expose the township to liability. Misclassification generally results in paying back whatever would have been owed in taxes or compensation and in many cases also results in extra penalties, especially if the misclassification is deemed intentional.

General Risks

Employers must provide workers’ compensation coverage to employees, but not to independent contractors. In return, employees cannot sue for on-the-job injuries where workers’ compensation covers the issue. Where a worker is misclassified as an independent contractor and suffers and on-the-job injury, Michigan’s workers’ compensation statute provides that the injured worker can sue the employer, and the employer can be fined up to $1,000 per day for violations and employer representatives can even face jail time (though unlikely unless the violation is flagrant and intentional).

In some cases, an agreement with an independent contractor results in a set fee for services that turns out to be below the minimum wage, or the employee works in excess of forty hours per week without overtime pay. If those situations arise and the worker was misclassified as an independent contractor, the township may find itself in violation of the Fair Labor Standards Act. If a worker was not paid the minimum wage or overtime because of a misclassification, the Fair Labor Standards Act allows for penalties including payment of the wages or overtime owed to the employee, plus an equal amount in damages (essentially double wages as a penalty), with the possibility of additional fines for willful violation.

If your township takes action against a worker who bands together with others to discuss or raise concerns about wages, benefits, or working conditions, the township may be violating labor laws that prohibit adverse employment action for those who engage in protected concerted activity or union organizing if that worker turns out to be misclassified as an independent contractor.

Misclassification might also mean that you suddenly owe certain employee benefits (pension and other retirement benefits, healthcare, etc.) to individuals who the township believed were not entitled to benefits as independent contractors. If that individual would’ve been entitled to benefits per your township’s written policies, you could be on the hook for benefits after the fact.

Aggrieved workers who were misclassified as independent contractors might also retroactively sue under anti-discrimination statutes if they believe they were discriminated against on the basis of a protected-class status. Independent contractors would not have the same ability to sue in most cases.

Tax Concerns

Employers owe certain tax obligations when dealing with employees that are not present when working with independent contractors. Tax implications of misclassification include payment of:

• Taxes Not Withheld (contributed by employer), including Employer FICA, State unemployment tax, and Federal unemployment tax (FUTA).
• Additions to Tax include interest and penalties.
• Exposure for Failure to Withhold and Deposit Federal Employment taxes.

If an employer “unintentionally” fails to deduct and withhold the correct amount from an employee’s wages because the employee was not treated as an employee, the employer is liable for 1.5 percent of the wages paid to the employee and 20 percent of FICA taxes. In cases where the employer “willfully attempts in any manner to evade or defeat any such tax or the payment thereof,” the amount of tax liability shall be, “in addition to other penalties provided by law, . . . a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.”

In “unintentional” cases, the “employer” is liable for the penalty while in “intentional” cases, this liability is extended to “any person required to collect, truthfully account for, and pay over any tax imposed . . ..” A “responsible” person can be an individual who signs payroll accounts, signs payroll returns, or holds an officer position.

VII. Conclusion

While there are certainly risks to misclassifying workers, a properly executed independent contractor arrangement (with a contract prepared in consultation with legal counsel) is a great tool to streamline operations and minimize costs. Although certain township positions such as the assessor or building official have some nuances to their classification, other positions can be made contractors so long as they pass the tests outlined in this Article.

If your township is looking to bring in new personnel or is simply reviewing existing arrangements, feel free to contact the municipal and employment law experts at Fahey Schultz Burzych Rhodes, PLC to ensure that your workers are properly classified.

By Chad Karsten

This publication is intended for educational purposes only. This communication highlights specific areas of law and is not legal advice. The reader should consult an attorney to determine how the information applies to any specific situation.