Independent Contractor vs Employee

Employee Definition

An employee is an individual who is subject to the control and direction of an employer in performing services as to both the result of his or her work and the details and means by which that result is accomplished. The description of the relationship by the parties will not control the final determination.

Independent Contractor Definition

An independent contractor is an individual who is subject to the control and direction of another individual only as to the result of his or her work, not as to the means and details to accomplish such. Under Treasury Regulation 31.3401(c)-1, "physicians, lawyers, dentists, veterinarians, contractors, subcontractors, public stenographers, auctioneers, and others who follow an independent trade, business or profession in which they offer their services to the public" are usually considered independent contractors. If a service requires special skill, any specialist called in to perform the task is usually an independent contractor.

Internal Revenue Service Tests

For many years the IRS used twenty factors to weigh the relationship in question and make its determination as to whether the individual was an employee or independent contractor (see Twenty Factors below). However, in the recent past the IRS issued Publication 1779, Independent Contractor or Employee . . . which detailed three broad categories it now uses to make its determinations. These three categories are:

  • Behavioral Control
  • Financial Control
  • Relationship of the Parties

Behavioral control consists of a determination as to whether the employer has a right to control how the work is accomplished. For example, if the individual receives instructions on "how, when or where to do the work, what tools or equipment to use, what assistants to hire to help with the work, and where to purchase supplies and services," this would usually signal an employer-employee relationship. It should be noted that not all situations that include instructions should be construed as an employer-employee relationship. For example, an individual could give an independent contractor less intensive instructions as to what time and at what place the accomplished work is supposed to be performed. Another example of a method used for behavioral control between an employer and an employee is training for required procedures and methods of accomplishing the work given by a company to an individual.

Financial control consists of a determination as to whether the employer has the right to control the financial aspect of the work. Factors that signify an independent contractor relationship include the individual having a significant investment in the work accomplished, the individual not being reimbursed for some or all business expenses, or the fact that the individual can realize a profit or incur a loss on his own.

Relationship of the parties consists of a determination as to how the employer and the individual perceive their relationship. If the individual receives employee benefits, such as insurance or paid leave, this would indicate the individual is an employee. A written contract will be very significant in this determination only if other evidentiary facts are unavailable.

Twenty Factors

EMPLOYEE

CHECK ONE

INDEPENDENT CONTRACTOR

... is required to comply with instructions about when,   where, and how to work. Employer's right to instruct, not the exercise of   that right, is the key. Instruction may be oral or in written procedures or   manuals.

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_____or_____

... is hired to provide goods or services and is not   instructed in great detail about how to provide the goods or services.

... is usually trained by one of the institution's   experienced employees. Training indicates that the employer wants the   services performed in a certain manner.

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_____or_____

... ordinarily uses his or her own methods, is hired   for his or her expertise, and receives no training from the institution that   purchases services.

... renders services which are usually integrated into   business operations, generally showing that direction and control are being   exercised. Integration of services into the business operation occurs when   the success or continuation of a business depends to an appreciable degree on   the performance of services that are difficult to separate from the business   operation.

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_____or_____

... renders services which can usually stand alone and   are not integrated into business operations.

... is hired to render services personally. If the   employer is interested in who does the job as well as in getting the job   done, it indicates that the employer is concerned about the methods used as   well as the results of services performed.

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_____or_____

... is hired to provide a service and often the   employer does not care who performs that job.

... has little control over the hiring, supervising,   and payment of assistants. Such action by an employer generally shows control   over people on the job with whom assistants work.

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_____or_____

... hires, supervises, and pays other workers under a   contract in which he or she agrees to provide materials and labor and is   responsible for the attainment of a given result.

... normally has a continuing relationship with the   person for whom services are performed. Services may be continuing even   though they are performed at irregular intervals, on a part-time basis,   seasonally, or over a short term.

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_____or_____

... has a defined relationship that typically ends when   the services are completed.

... has set hours or work established by the employer,   indicative of control. Such a condition bars the worker from allocating time   to other work, which is a right of an independent contractor.

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_____or_____

... tends to establish time use as a matter of right.

... usually devotes full time to the business of the   employer. Full time does not necessarily mean an eight-hour day or a five-day   week. Its meaning varies depending on the intent of the parties.

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_____or_____

... is free to work when, for whom, and for as many   employers as desired.

... typically does his or her work on the employer's   premises which implies control, especially if the work could be performed   elsewhere. Someone who works in the employer's place of business is at least   physically within the employees direction and supervision. However,   performance of work off-site does not, of itself, mean that no right to   control exists

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_____or_____

... usually does work that can be completed on or off   the employees premises.

... often must perform services in a prescribed   sequence, which shows a level of employer control. Here, too, the right to   set the sequence, not the exercise of that right, is the key.

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_____or_____

... normally is free to perform services in any manner   that produces desired results.

... submits or provides regular written or oral reports   that indicate employer control.

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_____or_____

... submits reports as specified by the contract and   may provide them in the broadest of terms and with less frequency than an   employee would.

.. is usually paid for work by the hour, week, or   month. The guarantee of a minimum salary or the granting of a drawing account   at stated intervals with no requirement for repayment of the excess over   earnings tends to indicate the existence of an employer-employee   relationship.

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_____or_____

... is customarily paid by the job in a lump sum or on   a commission basis.

... is reimbursed or paid by the employer for business   and traveling expenses, a factor that indicates control over the worker.

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_____or_____

... is paid on aj ob basis and normally has to assume   all expenses except those specified by contract.

... is reimbursed or paid by the employer for business   and traveling expenses, a factor that indicates control over the worker.

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_____or_____

... is paid on a job basis and normally has to assume   all expenses except those specified by contract.

... usually is furnished by the employer with any tools   and materials needed, which is indicative of employer control over the   worker. In some jobs, employees customarily use their own hand tools.

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_____or_____

... supplies the tools and equipment needed to complete   the job.

... normally does not have a significant investment in   the facilities used in the job.

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_____or_____

... often has a significant investment in facilities   used in performing services. Facilities generally include equipment or   premises necessary for the work, but not such items as tools, instruments,   and clothing that are provided by employees as a common practice in their   trade.

... usually does not realize a profit or suffer a loss   as a result of the service provided.

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_____or_____

... is in a position to realize a profit or suffer a   loss as a result of services provided.

... tends to work exclusively for one employer.

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_____or_____

... makes services available to the general public.   "Making services available" may include hanging out a shingle,   holding a business license, and having advertising and telephone directory   listings.

... is subject to discharge, showing that control is   exercised. Limitation of the right to discharge under a collective bargaining   agreement does not detract form the existence of an employer-employee   relationship.

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_____or_____

... cannot be fired so long as results produced measure   up to contract specifications.

... has the right to end the employment relationship at   any time without incurring liability.

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_____or_____

... usually agrees to complete a specific job and is   responsible for its satisfactory completion or is legally obligated to make   good for failure to complete the job

TOTAL

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_____ | _____

TOTAL