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Employee Vs. Independent Contractor?
The IRS uses the 20
Common Law factors as a guideline when determining if sufficient control is
present to establish an employer-employee relationship. This guide lists each
factor and provides elements characteristic of both employee and independent
contractor. The degree of importance of each factor varies depending on the
occupation and the scope of work being performed.
Under the common-law test, an employer-employee relationship is present when
the person for whom services are performed has the
right to
control and direct the individual who performs the services as to both:
1. The
result to
be accomplished by the work, and
2. The
details and
methods used in achieving the end result
It is not necessary that the hiring firm overtly direct or control the means
and methods by which a result is to be accomplished - all that is required is
that they have the right to do so.
1. Instructions
A worker who must comply with another persons' instructions about when, where
and how he or she is to work is ordinarily an employee. If the service
recipient has the right to require compliance with instructions, or require
completion of a different scope of work using specified guidelines, it is
likely that an employer-employee relationship exists.
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EMPLOYEE
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INDEPENDENT CONTRACTOR
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Must follow set and/or mandatory instructions, where,
when, how to perform work.
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Follows own individual instructions. Performs work based
upon independently established procedures or industry specs.
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2. Training
Training a worker to complete the task at hand or requiring a worker to attend
meetings and receive direction are factors indicative of an employer-employee
relationship. Training a worker in specific methods indicates that the service
recipient wants the services accomplished in a certain manner. Voluntary
uncompensated training may not be an indication of an employer-employee
relationship.
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EMPLOYEE
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INDEPENDENT CONTRACTOR
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Receives and/or is required to receive training.
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Skilled professional requiring no training to adequately
perform services.
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3. Integration of Services
When the success of a particular project is dependent upon the performance of
certain services, especially for a lengthy period in ongoing manner, the worker
who performs those services must necessarily be subject to a certain amount of
control by the service recipient. Integration of the worker's services into the
business operations generally shows that the worker is subject to direction and
control.
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EMPLOYEE
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INDEPENDENT CONTRACTOR
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Provides essential services which meld into overall
business operation.
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Work performed is not an "integral part," it is
a "unique" service.
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4. Services Rendered Personally
By requiring a worker to perform the contracted services personally, presumably
the service recipient is interested in the means and methods used to accomplish
the work in addition to the results.
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EMPLOYEE
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INDEPENDENT CONTRACTOR
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Required to render services personally.
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Has assistants or employees while retaining the right to
hire others to perform the required work.
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5. Hiring, Supervising, and Paying Assistants
If the service recipient supervises the hiring process and paying of
assistants, that factor generally shows control over the workers on the job.
However, if the worker performs the hiring, supervision and pays assistants and
is responsible only for the attainment of a result, this factor is indicative
of an independent contractor.
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EMPLOYEE
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INDEPENDENT CONTRACTOR
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Does not supervise or hire others.
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Hires assistants at his or her expense to perform all or
part of project.
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6. Regular and Continuous Relationship
A continuing relationship not based on projects between the worker and the
person or persons for whom the services are performed indicates that an
employer-employee relationship exists.
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EMPLOYEE
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INDEPENDENT CONTRACTOR
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Services are part of a continuing relationship.
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Provides services and contracts for separate and distinct
projects, not on continuing basis.
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7. Set Hours of Work
Requiring the work to be performed at set hours indicates control by the
service recipient over the worker and is indicative of an employer - employee
relationship.
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EMPLOYEE
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INDEPENDENT CONTRACTOR
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Required to work set hours.
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Retains right to complete work at any time.
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8. Full Time Required
If the worker must devote substantially full time to the business and is not
working on a project basis, the worker may be limited from performing services
elsewhere and to some extent is being controlled. An independent contractor is
free to perform work for other clients as he or she chooses.
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EMPLOYEE
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INDEPENDENT CONTRACTOR
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Required to devote full-time to a job on a Non-project
basis.
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Contract specifies what is to be accomplished by what
date.
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9. Doing Work on Employer's Premises
If the service recipient requires the worker to perform the work on-site and
the work could be done elsewhere, this factor suggests control.
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EMPLOYEE
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INDEPENDENT CONTRACTOR
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Required to work on-site, when alternatives exist.
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Rents/leases location where work is performed.
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10. Order or Sequence Set
If a worker must perform services in the order or sequence set by the service
recipient, this factor shows that the worker is not free to follow the worker's
own pattern of work. The worker should maintain this right. Adherence to an
established industry or technical standard is generally not regarded as control
on the part of the service recipient.
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EMPLOYEE
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INDEPENDENT CONTRACTOR
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Required to perform task in set manner, routine, schedule.
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Has full discretion over routine or manner in which to
perform services.
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11. Oral or Written Reports
Requiring the worker to submit regular oral or written reports indicates a
degree of control. Quality assurance checks with no evaluation system may not
indicate an employer-employee relationship.
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EMPLOYEE
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INDEPENDENT CONTRACTOR
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Required to submit regular oral and/or written work
reports where work is evaluated.
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Has few or no obligations to file regular written or oral
reports.
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12. Payment by Hour, Week, Month
Payment by the hour, week, or month generally points to an employer-employee
relationship. Contracts structured with payment made by the job or on a fixed
fee basis indicates that the worker is an independent contractor.
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EMPLOYEE
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INDEPENDENT CONTRACTOR
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A person is paid at regular intervals.
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Compensation determined separately by project or based on
fixed fee.
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13. Payment of Business and/or Traveling Expenses
Ordinarily employees are reimbursed for travel or business related expenses. An
employer, to be able to control expenses, generally retains the right to
regulate the worker's business activities. An independent contractor incurs and
pays travel and incidental costs as part of his/her ongoing business expenses.
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EMPLOYEE
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INDEPENDENT CONTRACTOR
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Expenses are paid or reimbursed.
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No reimbursement for out-of-pocket expenses.
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14. Furnish Tools or Equipment
The furnishing of significant tools, materials, and other equipment, tends to
reduce the workers risk of loss and lean towards the existence of an
employer-employee relationship.
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EMPLOYEE
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INDEPENDENT CONTRACTOR
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Tools and materials are furnished.
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Furnishes own tools and materials.
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15. Significant Investment
If the worker invests in facilities that are used in performing services that
factor tends to indicate that the worker is an independent contractor.
Particularly if part of this investment requires ongoing overhead or
maintenance costs. Lack of investment in facilities indicates dependence on the
service recipient for such facilities, and accordingly, the existence of an
employer-employee relationship.
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EMPLOYEE
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INDEPENDENT CONTRACTOR
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Does not invest in facilities and/or equipment used to
perform work.
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Possesses and invests in facilities and equipment to
perform services.
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16. Realization of Profit or Loss
A worker who can realize a profit or suffer a loss as a result of performing the
contracted services is generally an independent contractor. Independent
contractors are considered businesses. A business inherently incurs certain
financial risks and can realize profits while employees do not.
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EMPLOYEE
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INDEPENDENT CONTRACTOR
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Compensated for services at fixed rate regardless of
profitability.
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Shoulders the possibility of incurring a loss and
realizing a profit.
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17. Major Source of Income (Working for more than one firm at
a time).
Training a worker to complete the task at hand or requiring a worker to attend
meetings and receive direction are factors indicative of an employer-employee
relationship. Training a worker in specific methods indicates that the service
recipient wants the services accomplished in a certain manner. Voluntary
uncompensated training may not be an indication of an employer-employee
relationship.
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EMPLOYEE
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INDEPENDENT CONTRACTOR
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Performs services for only one firm at a time, on a non
project basis.
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Has numerous concurrent clients is not financially
dependent on any one.
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18. Making Service Available to General Public
The fact that a worker makes his or her services available to the general
public lends itself to independent contractor status.
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EMPLOYEE
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INDEPENDENT CONTRACTOR
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Services are not offered to general public, points toward
control.
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Offers services to public.
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19. Right to Discharge
An employer exercises control through the threat of dismissal, which to some
degree can cause the worker to comply with the employer's instructions. An
independent contractor, on the other hand, cannot be fired so long as he or she
produces a result that meets the contract specifications.
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EMPLOYEE
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INDEPENDENT CONTRACTOR
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Can be discharged at any time with no liquidated damages.
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Cannot be discharged other than for failure to perform
contracted service.
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20. Right to
Terminate
If the worker has the right to end his or her relationship with the service
recipient at will and not incur a liability, that factor indicates an
employer-employee relationship
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EMPLOYEE
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INDEPENDENT CONTRACTOR
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May terminate relationship
at any time.
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May terminate his or her
relationship Only upon completion of contract or breach by other party.
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