Employee or Independent Contractor? – The Halachic Considerations of Hiring
By: Rabbi Yehoshua Wolfe
As demand for an increased labor force rises, employers must decide whether to hire independent contractors (ICs), who produce goods or provide services but are not integrated into the employer’s business, or employees, who do become absorbed into the employer’s corporation. Hiring ICs is probably more appealing to many because of the financial benefit for the employer: whereas he must pay an unemployment tax (FUTA), workers compensation insurance and a portion of the employee , the employer does not have to pay payroll taxes for independent contractors. Hiring ICs, then, relieves the employer from the heavy burden of these expenses. Despite these tax benefits, employers are still left with the question of whether it is worthwhile to employ ICs, and this article will attempt to examine some of the costs and benefits of each position-type within a halachic framework.
Jewish labor law is complex. In view of that, to appropriately address the topic under discussion, it is imperative to set forth the basic structure in which Jewish labor laws function. The aforementioned concept of independent contractor and employee parallels the halachic employment relationship between an employer and service-provider. Corresponding to independent contractor and employee, an employer can hire either a scher yom/employee (SY), or a poel kablan/contractor (PK). Employment status in halacha, is determined by applying the following technical and objective test: when the contract allows a worker the independence to work on a self-determined schedule, he is halachicly considered a contractor. If however, he is required to work designated hours, he will usually be regarded as a SY.
This distinction between a PK and SY goes to the core of Jewish labor laws. Expounding on the pasuk “ki Li B’nei Yisroel Avodim”
the Talmud declares that the Jewish people are exclusively servants of Hashem and not of other people, who themselves are servants of Hashem. This statement is the basis of a number of significant laws. Though one may engage in employment, in theory this is forbidden for longer than three consecutive years, as permanent employment is viewed as a type of servitude. Furthermore, from this pasuk the Gemara derives that a SY is given an inalienable right to terminate his contract at any time, granted there is no harm to the employer. In light of the fact that a SY has the liberty to release himself from his duties, short-term employment is not a form of slavery. Although this freedom is only available to a SY and not a PK — because a contractor does not resemble a servant – nevertheless, a PK can’t always physically be forced to finish the job. That said, if a PK does not perform his duties, earned wages can be withheld to offset the cost of hiring a replacement.
In reality, the similarities between halachic and secular employees are deeper than a mere conceptual comparison. The structure of tax and civil labor laws (lehavdel) strongly resembles that of the Halacha. Just as the Halacha reflects respectively diverse SYs and PKs, so too does common secular law (lehavdil) recognize the difference between them. Nonetheless, secular law differs from halachic laws in regard to the exact guidelines distinguishing ICs from employees. The IRS advises that a service provider is considered an independent contractor for tax purposes if “the employer retains only the right to control or direct only the result of the work and not the means and methods of accomplishing the result.” If however, the employer “can control what will be done and how it will be done,” the service provider will generally be considered an employee. Unlike a secular independent contractor, a PK doesn’t necessarily boast complete autonomy over the job, only of his work hours. Consequently, although by and large halachic contractors align with ICs and SYs with employees, it is important to examine each situation on a case-by-case basis.
As a result of the aforementioned nuances, it appears that at times a PK will be viewed as an employee rather than an independent contractor in the American legal system, because the employer has the right of control over the job. Likewise, independent contractors in the American legal system will be judged as SYs within a halachic framework when the worker is constrained to specific work hours. Consider, for instance, a journalist. No newspaper can operate without a writing staff, and the employer certainly retains the “right of control” over his employees’ work, yet often times journalists have the liberty to work on their own timetable. Hence, in halacha a journalist will frequently be viewed as a contractor (PK).
It is equally fascinating that sometimes even a conforming PK, can be viewed in halacha as a vendor and not a service provider. There are several significant differences between vendors and service providers, with the employer’s payment obligation topping the list. While service providers are compensated for their labor, vendors are paid for their ownership of a certain product; therefore even after all of the work is complete, an employer can still technically back out of the deal until a proper kinyan on the object is performed. Service providers on the other hand, must always be paid for their finished labor. In any case, if the employer opts to back out, he might be liable for damages caused to the worker, such as, his expenses (which includes the value of his efforts)2 as well as missed employment opportunities. Thus it is important to establish whether a PK is a service provider or a vendor. As a rule, when the principal materials used belong to the employer, the worker will always be considered a service provider, but if the contractor is to furnish all supplies, his status is subject to debate among the poskim.
The application of this series of halachos significantly impacts common commercial practice, as is demonstrated by the following clause of an everyday building contract: “the owner does hereby employ the contractor to do all the work and provide all the materials, tools, machinery and supervision necessary for the construction of a (description of work) in the (property description), for the total sum of (amount of contract) all in accordance with the drawings, and specifications which are attached etc.” Since there is no explicit mention of a sale, this contract would fall into the abovementioned argument, and may be viewed as a sale of goods. This halacha applies only to PKs, as SYs are always considered service providers. Indeed, when the contractor’s materials are used, hiring PKs and not SYs may prove beneficial to the employer.
Many laws that govern financial transactions are primarily relevant during litigation, in lieu of a prior agreement. More often than not, two sides that mutually agree to disregard the law- are not “breaking the law”. Therefore, seeing as these secular laws contractually can be overridden, the principle of Dina Dmalchusa Dina (or “the law of the land is the law”) does not apply.2 Yet, when it comes to matters of labor, secular law is frequently relevant. This section will glance, through the prism of Halacha, at several legal differences between the compensation of employees and ICs. In addition, there will be a discussion of the difference between ICs and employees regarding Ona’ah, as well as opposing customs.
Let us begin with The Fair Labor Standards Act (FLSA) of 1938. The FLSA provides significant benefits to most “blue-collar” workers. Under the FLSA, employees must receive a minimum wage of $7.25 per hour. Furthermore, overtime pay of one and a half times the employee’s regular salary must be paid for any hours worked over forty hours per week. This law applies only to employees. ICs on the other hand, are not covered by the FLSA. Given that these obligations cannot be contractually overridden; according to many opinions, it may be halachicly inappropriate to deny any non-exempt employee of these benefits.
The stiff “hours worked” laws, spelled out in the Code of Federal Regulations (29 CFR Subpart C), is an adjunct to the FLSA. They therefore also cannot legally be denied due to any language in the contract.
Justified or undue, the result is taxing. Human resources often account for a substantial portion of company overhead, and even unassuming expenses often result in measurable spending. Employers, then, might be inclined to hire independent contractors in order to avoid these government-sanctioned requirements, which apply to employees, and not to independent contractors. However, employers seeking to gain relief from the provisions of the FLSA by hiring ICs should be mindful of Ona’ah. Ona’ah is classified as a subdivision of gezel (or theft), and exhibits an important halachic economic philosophy. Halacha widely views commerce as a fair exchange of wealth. Hence, the accepted common law practice of Caveat Emptor (a Latin saying for buyers beware) does not suffice, and anything short of fair market value, is then seen as a form of thievery.
While secular law (lehavdel) traditionally goes to great lengths to ensure the fair treatment of employees, the Torah, in contrast, relating to appropriate HR (human resources) compensation, exclusively protects contractors (PKs). Barring extreme circumstances, a laborer’s right to claim ona’ah vis-?-vis his employer can only be exercised by a PK – but not a SY. The parameters of how and when this claim is invoked stretch beyond the scope of this article. But as a final point on the matter, it is important to note that according to many opinions, the aforementioned differentiation between halachic employees and contractors applies only to the claim of ona’ah and not its prohibition.
Halacha puts forward the unspoken terms of an agreement. It governs business relationships not through external regulation, but as a capacity for ascertaining the intention of the contract. Thus, the Halacha, is secondary to any verbal stipulation. Moreover, the Talmud Yerushalmi states: “Minhag Mevatel Halacha” (or custom voids Halacha). Halacha maintains that unless alternatively specified, a contract follows course with the commercial custom. The Talmud Yerushalmi, then, is plainly understood: as it purely identifies intent, halacha embodies the custom.
Notably advancing this notion that the terms of a contract are determined in consideration of the commercial custom, Harav Moshe Feinstein ZT”L uses this principle in many instances where there is no recognized custom. He contends that if Halacha acknowledges that a contract is intended to comply with commercial custom, then certainly it acts in accordance with secular law. Harav Moshe ZT”L therefore contends that even at times when Dina Dmalchusa Dina technically might not apply, if not otherwise stipulated — even in absence of a practiced custom — the contract is assumed to follow the law of the land.
The relevance of the aforementioned halachos varies with the independent nature of every situation, and given their sensitive nature, they should be decided by a posek of superior stature – of which this writer is not. The following is a list of several commonly occurring issues where halachic counsel is advised.
Many firms routinely offer employer-provided benefits. These may include health insurance, paid vacation and pension plans. In situations where this custom exists, unless otherwise stipulated, the halacha allows employees to claim these benefits. Moreover, in industries where businesses do not usually offer benefits, but it is the custom of a particular firm to grant them, even if not specifically agreed upon, this is the assumed arrangement with respect to all individual employees. Seeing as benefits are usually only extended to employees and not ICs, here is another example of how employers save money by hiring independent contractors.
Additionally, though employees are usually given workspace and equipment, ICs themselves generally invest in these expenses. And finally, regarding some positions within the Jewish community, it is the custom that when a worker is excused without cause, he collects severance pay at the rate of one month per every year worked. This custom usually applies to employees and not ICs.
Upon embarking on any business venture, it is widely beneficial to anticipate that things might not go as planned, and staffing a job is no exception. When it comes to a worker’s liability for damages, employers might not be as safe as they think. For example, consider the process of building a house. If, in the course of construction, a builder damages some of the accomplished work, Halacha will certainly exempt him from paying the full value of the damage.3 In short, the prospect of serious losses to the employer undeniably exists. This section brings various liability concerns to light; as the diverse forms of IC, employee and employer accountability are demonstrated.
This section is divided into three subsections: a) Nezikin (tort) b) loss/theft c) the liability of a business on damage caused by its employees.
a) Nezikin (tort)
We begin with nezikin. The names employee and independent contractor in halacha, articulate a new connotation in the area of nezikin (or tort). To this point, we have reviewed ICs and employees within the framework of labor halacha and ona’ah where halacha relates to an employee as somewhat of a servant. Considering that much of labor halacha is based on the pasuk ëé ìé áðé éùøàì òáãéí — where the Torah refers to an employee as a “slave”– the halachic employee indeed resembles a servant. Moreover, the discussion of employees within the halachos of ona’ah is in reference to the Torah’s exclusion of slaves. However, with respect to the issue of liability for damages, the distinction between employee and independent contractor is based on economic reality. The essence of an employee is that he is compensated for labor; unlike a contractor who is paid for production.
The claim of mazik is limited to damages inflicted to the accuser’s property. In contrast, if damage occurs to the mazik’s own property, he technically cannot be held liable, even if the accuser’s interests are affected. As expressed in the Shulchan Aruch, “somebody who damages another party’s property is obligated to pay for the damage”. Thus, the issue of a craftsman’s liability on his work is dependant on the following matter: to whom does the product of a worker belong; is it the property of the employer, or the worker?
Let us say, for example, that a tailor is hired to make a suit from fabric furnished by the employer. The value of the fabric is 300 dollars and the completed net result is 1,000 dollars. Approaching the end of the tailor’s work, he damages the suit. The question arises whether the tailor is responsible for the damage. In view of the abovementioned principle that a mazik is only liable for damage to the complainant’s property, this matter shall depend on to whom the suit-in-progress belongs. If it is property of the tailor, the tailor is exempt from liability. If however it becomes property of the customer, he will be held accountable for the damage.
The source of this discussion is from the Talmud in Bava Kama and Bava Metzia. As a matter of halacha, the Shach contends that it remains a question, and the claim of mazik cannot be invoked to require recompense from the worker.
It is the opinion of the Aruch Hashulchan that this halacha only applies to PKs, but SYs are held liable for their damage. The Ketzos Hachoshen, on the other hand, holds that this exemption does include employees (SY). A full discourse on the exceptions to this rule is beyond the scope of this article.
Another aspect of worker liability is loss/theft, or any other damage to the employer’s property. This issue also depends on whether the worker is a SY or a PK. The Mishnah states: “all craftsmen are shomrei sachar (or paid custodians)”. A shomer sachar assumes responsibility on anything that happens to the depositor’s property, which is possible for him to prevent. Granted that in the Shach’s opinion, unless the work is performed in the employer’s premises, this halacha also applies to ICs; the Smah nonetheless maintains that only SYs accept this responsibility.
c) the liability of a business on damage caused by its employees
When it comes to an employer’s liability on damages caused by his workers, the halacha is largely unclear. For instance, if a business hires a truck-driver to deliver goods to its customers, and the driver gets into an accident and damages someone else’s property, is the business held accountable?
This question is based on a Mishah in Bava Kama. The Mishnah says, that a builder who is hired to knock down a wall, and directly damages either the wall itself or something else, is obligated to pay for the damage. The Shita Mekubetzes, in the name of various reshonim, says, this rule that the worker, and not the employer, is responsible, only applies when hiring PKs. If however the worker is an SY, according to some opinions, the employer must pay an equal portion of the damage. Other opinions contend that the employer exclusively is accountable. So, a business that hires an independent trucker (that has IC status) will never be held liable for damages caused by the driver, but if the driver is a SY, the business may be accountable. That being said, the Halacha in this case is not clear, because the employer is not present at the time of the damage.
Though this article addresses many key halachic distinctions between employees and ICs, further differences unquestionably exist. It is therefore advisable to seek guidance, on how best to halachicly structure human resources.therefore advisable to seek guidance, on how best to halachicly structure human resources.
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