Do I Have an Employee or an Independent Contractor?
July 19th, 2022 in Business Planning, Business Tax Planning, and Contracts
Have You Heard of the Difference Between an Employee or Independent Contractor?
It is all too easy to ignore the buzz of the Employee or Independent Contractor categorization debate. There are several different governmental institutions that care about the status of such individuals working in businesses. This status implicates many different legal issues from the rights of an employee to workman compensation to the requirement of an employer to pay payroll taxes.
Unfortunately, these governmental institutions have slightly different criteria regarding how to judge whether an individual is an independent contractor or employee, and no one factor is controlled in the below lists. Please consult legal counsel regarding best practices and planning to protect yourself and those you work with from the implications of mischaracterization. The best practice is to categorize these individuals correctly from the beginning of the relationship and legal counsel can help you do so. Good legal counsel may also advise you on ways to alter your interaction with individuals you already work with to stay protected from miscategorization. If you have any additional questions, please contact NC Planning at 919-900-4720.
Employee or Independent Contractor: The Factors to Consider
IRS Factors
The 20 factors used to evaluate the right to control and the validity of independent contractor classifications include:
- Level of instruction. If the company directs when, where, and how work is done, this control indicates a possible employment relationship.
- Amount of training. Requesting workers to undergo company-provided training suggests an employment relationship since the company is directing the methods by which work is accomplished.
- Degree in business integration. Workers whose services are integrated into business operations or significantly affect business success are likely to be considered employees.
- The extent of personal services. Companies that insist on a particular person performing the work assert a degree of control that suggests an employment relationship. In contrast, independent contractors typically are free to assign work to anyone.
- Control of assistants. If a company hires, supervises, and pays a worker’s assistants, this control indicates a possible employment relationship. If the worker retains control over hiring, supervising, and paying helpers, this arrangement suggests an independent contractor relationship.
- Continuity of relationship. A continuous relationship between a company and a worker indicates a possible employment relationship. However, an independent contractor arrangement can involve an ongoing relationship for multiple, sequential projects.
- The flexibility of the schedule. People whose hours or days of work are dictated by a company are apt to qualify as its employees.
- Demands full-time work. Full-time work gives a company control over most of a person’s time, which supports a finding of an employment relationship.
- Need for on-site services. Requiring someone to work on company premises—particularly if the work can be performed elsewhere—indicates a possible employment relationship.
- The sequence of work. If a company requires work to be performed in specific order or sequence, this control suggests an employment relationship.
- Requirements for reports. If a worker regularly must provide written or oral reports on the status of a project, this arrangement indicates a possible employment relationship.
- Method of payment. Hourly, weekly, or monthly pay schedules are characteristic of employment relationships unless the payments simply are a convenient way of distributing a lump-sum fee. Payment on commission or project completion is more characteristic of independent contractor relationships.
- Payment of business or travel expenses. Independent contractors typically bear the cost of travel or business expenses, and most contractors set their fees high enough to cover these costs. Direct reimbursement of travel and other business costs by a company suggests an employment relationship.
- Provision of tools and materials. Workers who perform most of their work using company-provided equipment, tools, and materials are more likely to be considered employees. Work largely done using independently obtained supplies or tools supports an independent contractor finding.
- Investment in facilities. Independent contractors typically invest in and maintain their own work facilities. In contrast, most employees rely on their employer to provide work facilities.
- Realization of profit or loss. Workers who receive predetermined earnings and have little chance to realize significant profit or loss through their work generally are employees.
- Work for multiple companies. People who simultaneously provide services for several unrelated companies are likely to qualify as independent contractors.
- Availability to the public. If a worker regularly makes services available to the general public, this supports an independent contractor determination.
- Control over discharge. A company’s unilateral right to discharge a worker suggests an employment relationship. In contrast, a company’s ability to terminate independent contractor relationships generally depends on contract terms.
- Right of termination. Most employees unilaterally can terminate their work for a company without liability. Independent contractors cannot terminate services without liability, except as allowed under their contracts.
Another Publication by the IRS Broke it Down Into Categories
These facts fall into three main categories:
Behavioral Control
Facts that show whether the business has a right to direct and control. These include:
- Instructions – an employee is generally told:
1. When, where, and how to work
2. What tools or equipment to use
3. What workers to hire or to assist with the work
4. Where to purchase supplies and services
5. What work must be performed by a specified individual
6. What order or sequence to follow
- Training – an employee may be trained to perform services in a particular manner.
Financial Control
Facts that show whether the business has a right to control the business aspects of the worker’s job include:
- The extent to which the worker has unreimbursed expenses
- The extent of the worker’s investment
- The extent to which the worker makes services available to the relevant market
- How the business pays the worker
- The extent to which the worker can realize a profit or loss
Type of Relationship
Facts that show the type of relationship include:
- Written contracts describing the relationship the parties intended to create
- Whether the worker is provided with employee-type benefits
- The permanency of the relationship
- How integral the services are to the principal activity
Department of Labor
7 Factor test
1) The extent to which the services rendered are an integral part of the principal’s business.
2) The permanency of the relationship.
3) The amount of the alleged contractor’s investment in facilities and equipment.
4) The nature and degree of control by the principal.
5) The alleged contractor’s opportunities for profit and loss.
6) The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
7) The degree of independent business organization and operation.
