With increasing frequency, most businesses–large and small–are calling workers independent contractors when in fact they should be paid and treated as employees. Their primary reasons for doing so is to unlawfully avoid paying required taxes and insurance such as social security, worker’s compensation and unemployment insurance and to prevent workers from being entitled to fringe benefits such as vacation, health insurance and company pension plans. However, the mere designation by the employer of a worker as an “independent contractor” is not necessarily the final word on the matter.
In order to assist businesses and workers, the IRS has adopted rules to distinguish between independent contractors and employees. The IRS has stated eleven main tests and organized those tests into three main groups: behavioral control, financial control, and the type of relationship of the parties (see link below). The groups and tests appear below along with explanatory comments regarding each one:
Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of:
Instructions the business gives the worker. An employee is generally subject to the business’ instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work:
The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right.
Training the business gives the worker. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.
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 business expenses. Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services they perform for their business.
The extent of the worker’s investment. An employee usually has no investment in the work other than his or her own time. An independent contractor often has a significant investment in the facilities he or she uses in performing services for someone else. However, a significant investment is not necessary for independent contractor status.
The extent to which the worker makes services available to the relevant market. An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.
How the business pays the worker. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.
The extent to which the worker can realize a profit or loss. Since an employer usually provides employees a workplace, tools, materials, equipment, and supplies needed for the work, and generally pays the costs of doing business, employees do not have an opportunity to make a profit or loss. An independent contractor can make a profit or loss.
Facts that show the parties’ type of relationship include:
Written contracts describing the relationship the parties intended to create. This is probably the least important of the criteria, since what really matters is the nature of the underlying work relationship, not what the parties choose to call it. However, in close cases, the written contract can make a difference.
Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay. The power to grant benefits carries with it the power to take them away, which is a power generally exercised by employers over employees. A true independent contractor will finance his or her own benefits out of the overall profits of the enterprise.
The permanency of the relationship. If the company engages a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship.
The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of the company’s regular business activity, it is more likely that the company will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.
For all those people working now as supposed independent contractors or thinking about accepting offers to work as an independent contractor, you should carefully review the above factors to see if, in fact, you should be treated as an employee with the rights and benefits which that status entitles. If you believe that you are being wrongly categorized by the company you are working for, you should contact the IRS or appropriate state labor agency for assistance or consult with an attorney in your locale who specializes in employment law.
Additional Resources: IRS Publication 15-A