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| home :· compliance :· IRS 20 factors test |
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The IRS has provided a list of 20 common law factors to assist in determining whether a contingent worker is an employee or an independent contractor. It is important that your company is not exposed to risk of independent contractor reclassification, or you may be faced with very expensive fines, penalties and potential law suits. These factors are intended as guidelines, and not as strict rules. In fact, the IRS itself states, "The degree of importance of each factor varies depending on the occupation and the factual context in which the services are performed." 1. Instructions Is the person providing services required to comply with instructions about when, where and how the work is to be done? A worker who is required to comply with instructions about when, where and how he or she is to work is typically an employee. This control factor is present if the entity for whom the services are performed has the right to require compliance with instructions. Is the person provided training to enable him or her to perform a job in a particular method or manner? 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 entity for whom the services are performed wants the services performed in a particular method or manner. Are the services provided by the worker integrated into the business' operation? Integration of the worker's services into the business operations typically 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 entity/business. 4. Services rendered personally Must the services be rendered personally? If the services must be rendered personally, presumably the entity for which the services are performed is interested in the methods used to accomplish the work as well as in the results. 5. Hiring, supervising and paying assistants Does the business hire, supervise or pay assistants to help the worker performing the services under contract? If the entity for which the services are performed hires, supervises, and pays assistants, these factors generally show control over the workers on the job. However, if one worker hires, supervises, and pays the other assistants pursuant to a contract under which the worker agrees to provide materials and labor and under which the worker is responsible only for the attainment of a result, this factor indicates an independent contractor status. Is the relationship between the individual and the person they perform services for a continuing relationship? A continuing relationship between the worker and the entity for which the services are performed indicates that an employer-employee relationship exists. A continuing relationship may exist where work is performed at frequently recurring, although irregular intervals. Who sets the hours of work? The establishment of set hours of work by the entity for which the services are performed is a factor indicating control. Is the worker required to devote their full time to the entity for which he or she performs services? If the worker must devote substantially full time to the business of the entity for which the services are performed, such entity has control over the amount of time the worker spends working and impliedly restricts the worker from doing other gainful work. An independent contractor on the other hand, is free to work when and for whom he or she chooses. 9. Doing work on employer's premises Is the work performed at the place of the business of the potential employer? If the work is performed on the premises of the entity for which the services are to be performed, suggests control over the worker, especially if the work could be done elsewhere. Work done off the premises of the entity receiving the services, such as at the office of the worker, indicates some freedom from control. However, this fact by itself does not mean that the worker is not an employee. The importance of this factor depends on the nature of the service involved and the extent to which an employer generally would require that employees perform such services on the employer's premises. Control over the place of work is indicated when the entity for which the services are performed has the right to compel the worker to travel a designated route, to canvass a territory within a certain time, or to work at specific places as required. Who directs the order or sequence in which the work must be done? If a worker must perform services in the order or sequence set by the entity for which the services are performed, 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 entity for which the services are performed. Often, because of the nature of an occupation, the entity for which the services are performed does not set the order of the services or sets the order infrequently. It is sufficient to show control, however, if such entity retains the right to do so. Are regular written or oral reports required? A requirement that the worker submit regular or written reports to the entity for which the services are performed indicates a degree of control on the part of the entity. 12. Payment by hour, week, month What is the method of payment - hourly, commission or by the job? Payment by the hour, week, or month generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment made by the job or on straight commission generally indicates that the worker is an independent contractor. 13. Payment of business and/or traveling expenses Are business and/or traveling expenses reimbursed? If the entity for which the services are performed typically pays the worker's business and/or traveling expenses, the worker is typically an employee. An employer, to be able to control expenses, generally retains the right to regulate and direct the worker's business activities. 14. Furnishing of tools and/or materials Who furnishes tools and materials used in providing services? The fact that the entity for which the services are performed furnishes significant tools, materials, and other equipment tends to show the existence of an employer-employee relationship. Does the person providing services have a significant investment in facilities used to perform services? If the worker invests in facilities that are used by the worker in performing services and are not typically maintained by employees (such as the maintenance of an office rented at fair value from an unrelated party), that factor tends to indicate that the worker is an independent contractor. On the other hand, lack of investment in facilities indicates dependence on the entity for which the services are performed for such facilities and, accordingly, the existence of an employer-employee relationship. Special examination is required with respect to certain types of facilities, such as home offices. 16. Realization of profit or loss Can the person performing the services realize both a profit or a loss? A worker who can realize a profit or suffer a loss as a result of the worker's services (in addition to the profit or loss ordinarily realized by employees) is generally an independent contractor, but the worker who cannot is an employee. For example, if the worker is subject to a real risk of economic loss due to significant investments or a bona fide liability for expenses, such as salary payments to unrelated employees, indicates that the worker is an independent contractor. The risk that a worker will not receive payment for his or her services, however, is common to both independent contractors and employees and thus does not constitute a sufficient economic risk to support treatment as an independent contractor. 17. Working for more than one firm at a time Can the person providing services work for a number of firms at the same time? If a worker performs services for a multiple of unrelated entities at the same time generally indicates that the worker is an independent contractor. However, a worker who performs services for more than one entity may be an employee of each of the entities, especially where such entities are part of the same service arrangement. 18. Making service available to general public Does the person make their services available to the 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 relationship. Is the person providing services subject to dismissal for reasons other than nonperformance of contract specifications? The right to discharge a worker is a factor indicating that the worker is an employee and the entity possessing the right is an employer. An employer exercises control through the threat of dismissal, which causes the worker to obey the employer's instructions. An independent contractor, on the other hand, cannot be fired so long as the independent contractor produces a result that meets the contract specifications. Can the person providing services terminate his or her relationship without incurring a liability for failure to complete a job? If the worker has the right to end his or her relationship at any time he or she wishes, without incurring liability from the entity for which the services are performed, indicates an employer-employee relationship. |
Note:
The information contained herein has been compiled from several
publicly available on-line and offline resources, and as such is
not intended to be, and should not be used as a substitute for professional
legal advice. |
