Contractor or Employee? 20 Factors to Look for
As more and more workers take on part-time or freelance jobs, employers are having trouble determining where the line is between a contractor and a full-fledged employee.
In its Revenue Ruling 87-41, the IRS listed 20 common law factors to help employers determine whether a person is an employee or an independent contractor.
Those factors are:
Instructions
If a worker is expected to comply with someone’s specific instructions on when, where, and how to work, that person is a traditional employee. Only when the employer has the right to require compliance with their instructions is this condition present.
This condition doesn’t apply to due dates set by the person requesting the work.
Training
When a regular employee is required to train the worker, correspond with the worker, requires that the worker attend meetings, or uses other methods to train and work alongside the worker, then the IRS says that indicates that the employer wishes the work to be done in a specific manner.
While this condition alone doesn’t indicate that a person is a regular employee, its presence alongside other factors indicates that the worker should be considered an employee.
Integration
Are the services the person provides to the company integral to the overall business operations?
The more integrated the worker’s tasks and work to the business, the more likely that person should be considered an employee.
Services Rendered Personally
If the employer requires that the worker’s services be provided in person and in a particular manner, the IRS says that indicates that the employer is interested in the methods of work as well as the results.
Hiring, Supervising, & Paying Assistants
If the person for whom work is provided routinely hires, supervises, and trains assistants, this shows control over personnel.
However, in cases where the person providing the work can hire, supervise, and train their own assistants to help them achieve the results, then they are considered an independent contractor.
Continuing Relationship
The longer a worker has a relationship with the business, the more likely they are to be considered an employee.
Set Hours of Work
If the person for whom the work is being done has control over the number and timing of hours the worker puts in, then they are in an employer-employee relationship.
Full-Time Required
When a worker must devote a significant amount of time working for the employer, especially if that amount of time keeps the worker from accepting jobs elsewhere, they are more likely considered an employee.
Doing Work on the Employer’s Premises
While a worker being required to render a service on the employer’s premises doesn’t necessarily mean that person is an official employee, the employer being able to require that the worker be on-site can.
If a task doesn’t require that a worker be on premises, yet that worker is required to be on-site and use desk space, shared services, or other equipment owned by the business, then they are considered an employee.
For services that are contractual but require the worker to be on-site, the amount of control the employer has over the worker’s methods and schedule can be a determining factor in this condition.
Order or Sequence Set
If the person paying for the work to be done can dictate the exact order in which work is done, this shows a level of control that may indicate an employer-employee relationship.
Oral or Written Reports
When a worker is required to provide frequent oral or written reports regarding their work, the IRS says that shows that the person paying for work is more interested in the methods used to do the work than the results themselves.
Payment by Hour, Week, or Month
When a worker receives paychecks on regular intervals, this tends to indicate an employer-employee relationship. Independent contractors, by contrast, are paid in other intervals, including lump sum, per project, or lump sum paid in installments.
Payment of Business and/or Travel Expenses
If an employer pays for a person’s business-related and travel expenses, that typically means they are an official employee. On the other hand, when a person is expected to pay for their own business and travel expenses, they usually are an independent contractor.
Furnishing of Tools, Materials, and Machinery
In most cases, if an employer furnishes tools, materials, and machinery that must be used to execute a job, then those people are most likely employees.
However, this is not always the case. In some instances, an independent contractor may use specialized tools or machinery provided by the person requesting their work, but still be an independent contractor due to a variety of other factors.
Significant Investment
When a worker has put significant investment into building or furnishing facilities that allow them to do work, they are usually considered an independent contractor. An employee, on the other hand, uses facilities furnished and operated by the employer.
Working for More than One Firm
Someone who works for more than one business or firm at one time is generally an independent contractor.
Realization of Profits and Losses
A person who puts their own assets at risk and who can realize profits or losses as the result of their work is usually considered an independent contractor.
The IRS defines the opportunity to realize a profit or loss as dependent on a variety of factors, including:
- The individual hires, pays, and directs assistants
- The individual has an office, equipment, materials, and work facilities
- The individual has a business reputation at stake
- The individual has exposure to liabilities in the regular course of business
- The individual may bid on specific jobs and, as a result, runs the risk of overbidding or underbidding
Making Services Available to the General Public
If the individual makes their services available to the general public on a regular basis, they are considered an independent contractor.
Right to Discharge
The right to hire and fire employees is one of the most important determining factors in the independent contractor vs. employee debate.
With an employee, the employer exercises control over the other person with the threat of dismissal. An independent contractor, on the other hand, cannot be fired as long as their work meets the expected results set out in the contract.
Right to Terminate
In the regular course of business, employees have the right to terminate their relationship with an employer without fear of liability. This is especially true for those employees who do not operate under specific contracts.
Independent contractors, on the other hand, do not have the right to terminate their relationship with the person paying for their work at will, as they have to operate under the terms of the written contract.
What Does This Mean for Me?
There is no one factor in this list of 20 that absolutely says that a person is an independent contractor or an employee. Instead, it’s a combination of the factors that makes the determination.
If you’re wondering whether someone who works for you is a full-fledged employee or an independent contractor, it’s best to consult with an attorney to help you make a determination.
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