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20 Factor Common Law Test for Employee Classification

The courts have put together a series of questions based on the common law principles to determine a worker's classification.  The courts have noted that no one factor is determinative, and simply having more than half of the factors doesn’t guarantee a result. The importance of each factor varies depending on the occupation and the context in which the services are performed.  Some courts have held that these factors are not all-inclusive and other factors might come into play. The 20 factors that the courts have developed to help with the determination of your worker's classification include:

1.  Level of instruction

• Does the company direct when, where and how the work is done?  If the company does have this control over the work, this would suggest the worker is an employee.

2.  Amount of training

• If the company is requiring a worker to receive training from the company, this would suggest that the worker is an employee since the company is directing the methods used to accomplish the worker's tasks.

3.  Degree of business integration

• Do the worker and the company have a continuing working relationship?  If so, this would suggest that the worker should be considered an employee as the work accomplished is significant to the business's success.  This would also show that the employee is subject to direction and control of the business.

4.  Extent of personal services

• Does the worker provide services personally?  If so, the worker would be considered an employee. Companies that insist on a particular worker performing the work hold a degree of control over the worker that suggests an employee relationship, whereas independent contractors are usually free to assign work to anyone they choose.

5.  Control of assistants

• An employee works for an employer who hires, supervises and pays workers, whereas an independent contractor can hire, supervise and pay assistants.

6.  Continuity of relationships

• Even though a continuing relationship can occur between a company and an independent contractor, a continuous relationship between a company and a worker usually means an employment relationship is present.

7.  Flexibility of Schedules

• Employees tend to have set hours established by the company, whereas independent contractors generally set their own hours.

8.  Demands for full-time work

• A worker who is required to work full time generally suggests an employment relationship, giving the company control over the employee's time.

9.  Need for on-site services

• If a worker is required to work on the company's premises even if the work can be performed elsewhere, generally suggests an employment relationship.

10. Sequence of work

• An employee may be required to work in a certain order or sequence set by the employer; this shows the employee is subject to discretion and control and suggests an employment relationship.

11. Requirement for reports

• A worker having to report his or her progress on a project to the company usually demonstrates an employment relationship, showing control over the worker.

12. Method of payment

• An employee is usually paid hourly, weekly or monthly, whereas an independent contractor is paid commission or upon the completion of a job.

13. Payment of business or travel expenses

• If travel and business expenses are reimbursed, this usually represents an employment relationship, as independent contractors typically have to pay for their own business and travel expenses. 

14. Provision of tools and materials

• Employees are usually provided with company tools and materials in order to perform their jobs, whereas independent contractors usually supply their own tools.

15. Investment in facilities

• Employees don’t have an investment in the facilities used to perform their work and rely on their employers to provide work facilities, whereas independent contractors typically invest in and maintain their own work facilities. 

16. Realization of profit or loss

• Independent contractors can make a profit or suffer a loss on a project, whereas employees who receive a salary do not have the risk of a loss.

17. Work for multiple companies

• Employees work for one firm, whereas independent contractors can be working for multiple companies at once.

18. Availability to public

• An independent contractor makes his or her services available to the general public.

19. Control over discharge

• An employee can be fired by his or her employer, whereas an independent contractor's termination usually depends on the contract terms.

20. Right of termination

• Employees can quit their job at any time without incurring a liability, whereas independent contractors have contract terms that they have to fill and are responsible for the completion of a project.

The IRS has divided these multiple factors into three broad classifications: behavioral control, financial control, and the relationships of the parties.  Behavioral control covers facts that show whether the business has a right to direct and control how work is done.  Financial control refers to factors that show whether the business has a right to control the financial and business aspects of the worker's job. Type-of-relationship factors include written contracts, ability to perform services for other similar businesses, whether employee benefits are provided, permanency of the relationship, and how integral to the company’s regular business the services provided are.

For further information please contact contact Kim Haumann at 312-980-3249, or your Blackman Kallick representative. 

 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.