Employee or Independent Contractor?

Monday, March 10, 2008
Contributed by: Joel Griffith

Should you classify your workers as employees or independent contractors?

A worker is a common law employee if the employer has the right to direct and control the worker. The general rule is that an individual is an independent contractor if the person for whom the services are performed has the right to control or direct only the results of the work and not the means and methods of accomplishing the result. The relationship of the worker and the business must be examined and the substance of the relationship, not the label, governs the worker's status.

In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered. Facts that provide evidence fall into three categories: behavioral control, financial control, and the type of relationship of the parties.

Behavioral Control

Facts that show whether the business has behavioral control, or a right to direct and control how the worker does the task for which the worker is hired, include the type of and degree of instruction and training the business gives to the worker.

Financial Control

Facts that demonstrate that a business has financial control, or a right to control the business aspects of the worker's job, include the extent to which the worker has unreimbursed business expenses, the extent of the worker's investment, the extent to which the worker makes his or her services available to the relevant market, how the business pays the worker, and the extent to which the worker can realize a profit or loss.

Relationship of Parties

Facts relevant in determining the type of relationship include written contracts describing the relationship the parties intended to create, whether the business provides the worker with employee-type benefits, the permanency of the relationship, and the extent to which services performed by the worker are a key aspect of the regular business of the company.

Revenue Ruling 87-41

As an aid in determining whether an individual is an employee under the common law rules, twenty factors or elements have been identified as indicating whether sufficient control is present to establish an employer-employee relationship. The factors may be found in Revenue Ruling 87-41 and are listed below:

  • Instruction
    • A worker who is required to comply with other persons' instructions about when, where, and how he or she is to work is ordinarily an employee.
  • Training
    • Training a worker by requiring an experienced employee to work with the worker, by corresponding with the worker, by requiring the worker to attend meetings, or by using other methods indicates that the person or persons for whom the services are performed want the services performed in a particular method or manner.
  • Integration
    • Integration of the worker's services into the business operations generally shows that the worker is subject to direction and control. When the success or continuation of a business depends to an appreciable degree upon the performance of certain services, the workers who perform those services must necessarily be subject to a certain amount of control by the owner of the business.
  • Services Rendered Personally
    • If the services must be rendered personally, presumably the person or persons for whom the services are performed are interested in the methods used to accomplish the work as well as in the results.
  • Hiring, Supervising, and Paying Assistants
    • If the person or persons for whom the services are performed hire, supervise, and pay assistants, that factor generally shows control over the workers on the job.
  • Continuing Relationship
    • A continuing relationship between the worker and the person or persons for whom the services are performed indicates that an employer-employee relationship exists.
  • Set Hours of Work
    • The establishment of set hours of work by the person or persons for whom the services are performed is a factor indicating control.
  • Full Time Required
    • If the worker must devote substantially full time to the business of the person or persons for whom the services are performed, such person or persons have control over the amount of time the worker spends working and impliedly restrict the worker from doing other gainful work.
  • Doing Work on Employers Premises
    • If the work is performed on the premises of the person for whom the services are performed, that factor suggests control.
  • Order or Sequence Set
    • If a worker must perform services in the order set by the person for whom the services are performed, that factor shows that the worker is not free to follow the worker's own pattern of work but must follow the established routines and schedules of the person for whom the services are performed.
  • Oral or Written Reports
    • A requirement that the worker submit regular or written reports to the person for whom the services are performed indicates a degree of control.
  • Payment by Hour, Week, Month
    • Generally points to an employer-employee relationship.
  • Payment of Business and/or Training Expenses
    • If the person for whom the services are performed ordinarily pay the worker's business and/or traveling expenses, the worker is ordinarily an employee.
  • Furnishing of Tools and Materials
    • Tends to show existence of employer-employee relationship.
  • Significant Investment
    • If the worker invests in facilities that are used, that factor tends to indicate an independent contractor.
  • Realization of Profit or Loss
    • A worker who can realize a profit or suffer a loss as a result of the worker's services is generally an independent contractor.
  • Working for More than One Firm at a Time
    • If a worker performs more than de minimis services for a multiple of unrelated persons or firms at the same time, that factor generally indicates that the worker is an independent contractor.
  • Making Service Available to General Public
    • The fact that a worker makes his or her services available to the general public on a regular and consistent basis indicates an independent contractor.
  • Right to Discharge
    • The right to discharge a worker is a factor indicating that the worker is an employee.
  • Right to Terminate
    • If the worker has the right to end his or her relationship with the person for whom the services are performed at any time he or she wishes without incurring liability, that factor indicates an employer-employee relationship.

This column is published for informational purposes only. It should not be construed as legal advice and is not intended to create an attorney client relationship. The views expressed are those of the author and do not necessarily reflect the views of the author's law firm or its individual partners.