The difficulty in applying the common law test is deciding whether a hiring firm has the right to control its workers. The government agencies you have to deal with can’t look into your mind to see whether the right to control exists. They must rely primarily on indirect or circumstantial evidence indicating control or lack of it—for example, whether you provide a worker with tools and equipment, pay by the hour or have the right to fire the worker. This is what government auditors will be asking you about if you’re audited.
To evaluate whether a worker passes muster as an IC, you need to examine these factors. The fact that you may know in your heart that you do not control a worker is not sufficient. What matters is how your relationship with the worker appears to a government auditor who doesn’t know you or the worker.
Government auditors examine a number of different factors to determine whether a hiring firm has the right to control a worker. The following list of 25 factor includes virtually every factor any auditor might consider. No agency uses all 25 factors; instead an agency may use anywhere from four to 20 from this list. Which factors are used by which agency is discussed in later chapters.
You don’t need to memorize this list. It’s included so that you can refer to it if you need it. There’s no magic number of factors that you need to make a worker an IC or an employee. You need to look at the totality of the circumstances. In many cases, you will look at the list and so many factors will weigh in favor of IC status or employee status that you can feel secure in your classification. In other cases, you make go through the list and still feel like you don’t know how to classify the worker. When that happens, consider consulting an expert, such as an accountant or an attorney, for assistance.
1. Making a Profit or Loss
Employees are typically paid for their time and labor and have no liability for business expenses. They will earn the same salary regardless of how the work is performed.
In contrast, ICs can earn a profit or suffer a loss as a result of the services being performed. They make money if their businesses succeed, but risk going broke if they fail. Whether ICs make money depends on how well they use their ingenuity, initiative and judgment in conducting their business.
Thus, if a worker has an opportunity to make a profit or suffer a loss based on the work being performed, then that fact makes the worker look more like an independent contractor.
2. Working on Specific Premises
Employees must work where their employers tell them, usually on the employer’s premises. ICs are usually able to choose where to perform their services. Thus, work at a location specified by a hiring firm implies control by the firm, especially where the work could be done elsewhere. A person working at a hiring firm’s place of business is physically within the firm’s direction and supervision. If the person can choose to work off the premises, the firm obviously has less control. If a worker performs the work on your premises, that’s a check in the independent contractor side of the column.
3. Offering Services to the General Public
Employees offer their services solely to their employers; ICs normally make their services available to the public. Thus, if the worker advertises his services or works for people other than the hiring firm, this tends to show that the worker is an IC.
4. Right to Fire
Unless the employee has an employment contract, the employee typically can be fired by the employer at any time, for any reason that is not illegal. An IC’s relationship with a hiring firm can be terminated only according to the terms of their agreement. If you have a right to fire a worker at any time for any reason or for no reason at all, government auditors may conclude that you have the right to control that worker. The ever-present threat of dismissal must inevitably cause a worker to follow your instructions and otherwise do your bidding. Thus, the right to fire weighs in favor of employee status.
5. Furnishing Tools and Materials
Employees are typically furnished all the tools and materials necessary to do their jobs by their employers. ICs typically furnish their own tools and materials.
The fact that a hiring firm furnishes tools and materials, such as computers and construction equipment, tends to show control because the firm can determine which tools the worker is to use and, at least to some extent, in what order and how they will be used. In most circumstances, then, the furnishing of tools and materials by the hiring firm weighs in favor of IC status.
Tip Sometimes, Tools Don’t Matter
Sometimes ICs have to use a hiring firm’s tools or materials. For example, a computer consultant may have to perform work on the hiring firm’s computers. In such a situation, the fact that the tools are provided should be irrelevant.
6. Method of Payment
Employees are usually paid by unit of time—for example, by the hour, week or month. In such a situation, the hiring firm assumes the risk that the services provided will be worth what the worker is paid. To protect its investment, the hiring firm demands the right to direct and control the worker’s performance. In this way, the hiring firm makes sure it gets a day’s work for a day’s pay.
ICs typically earn a flat rate for a project. The IC assumes the risk that the estimate for the rate will compensate for the time and expense spent on the project. The IC, then, will control how he does the work.
Thus, payment by the job or on a straight commission generally weighs in favor of IC status.
In many professions and trades, however, payment is customarily made by unit of time. For example, lawyers, accountants and psychiatrists typically charge by the hour. Where this is the general practice, the method of payment factor will not be given great weight.
7. Working for More Than One Firm
Many employees have more than one job at a time. However, employees owe a duty of loyalty toward their employers—that is, employees cannot engage in activities that harm or disrupt the employer’s business. This restricts employees’ outside activities. For example, an employee ordinarily wouldn’t be permitted to take a second job with a competitor of the first employer. An employee who did so would be subject to dismissal.
ICs are generally subject to no such restrictions. They can work for as many clients or customers as they want. Having more than one client or customer at a time is very strong evidence of IC status. People who work for several firms at the same time are generally ICs because they’re usually free from control by any one of the firms.
8. Continuing Relationship
Although employees can be hired for short-term projects, this type of relationship is more typical of ICs. An employee usually works for the same employer month after month, year after year, sometimes decade after decade. Such a continuing relationship is one of the hallmarks of employment. Indeed, one of the main reasons businesses hire employees is to have workers available on a long-term basis.
ICs, on the other hand, come and go. A firm hires them for a project, and then the relationship ends.
Thus, a continuing relationship is evidence of employee status.
9. Investment in Equipment or Facilities
A worker who makes a significant investment in the equipment and facilities to perform services is more likely to be considered an IC. By making such a financial investment, the worker risks losing it if the business is not profitable. Also, the worker is not dependent upon a hiring firm for the tools and facilities needed to do the work. Owning the tools and facilities also implies that the worker has the right to control their use.
On the other hand, lack of investment indicates dependence on the hiring firm for tools and facilities and is another hallmark of an employer-employee relationship.
This factor includes equipment and premises necessary for the work, such as office space, furniture and machinery. It does not include tools, instruments and clothing commonly provided by employees in their trade—for example, uniforms that are commonly provided by the employees themselves. Nor does it include education, experience or training.
Some types of workers typically provide their own inexpensive tools. For example, carpenters may use their own hammers and accountants their own calculators. Providing such inexpensive tools doesn’t show that a worker is an IC. But a worker who provides his or her own $3,000 computer or $10,000 lathe is more likely to be an IC.
10. Business or Traveling Expenses
If the hiring firm pays a worker’s business and traveling expenses, that fact points to employee status. To be able to control such expenses, the employer must retain the right to regulate and direct the worker’s actions.
On the other hand, a person who is paid per project and who has to pay expenses out of pocket is more likely to be viewed as an IC. Any worker who is accountable only to himself or herself for expenses is free to work according to individual methods and means.
Of course, some ICs typically bill their clients for certain expenses. For example, accountants normally bill clients for travel, photocopying and other incidental expenses. This does not make them employees, since their clients do not control them.
11. Right to Quit
Employees normally work “at will.” This means they can quit whenever they want to without incurring liability, even if it costs the employer substantial money and inconvenience.
ICs usually agree to complete a specific job. If they don’t, they are liable to the hiring firm to make good any losses caused.
12. Instructions
Employers have the right to give their employees oral or written instructions that the employees must obey about when, where and how they are to work. Hiring firms generally do not give independent contractors these sorts of instructions.
This can be a difficult factor to evaluate because there is no requirement that instructions actually be given. Instead, the focus is on whether the hiring firm has the right to give them.
If a worker is running an independent business and you are just one client or customer among many, it’s likely you don’t have the right to give the worker instructions about how to perform the services. Your right is usually limited to accepting or rejecting the final results.
EXAMPLE: Art goes to Joe’s Tailor Shop and hires Joe to make him a suit. Art chooses the fabric and style of the suit, but it’s up to Joe to decide how to make the suit. When the suit is finished, Art can refuse to pay for it if he thinks it isn’t made well. Joe is an independent contractor. If Art had presumed to tell Joe how to go about cutting the fabric and stitching the suit together, Joe would probably have kicked him out of his shop and gone on to his next customer.
On the other hand, you probably will have the right to give instructions to workers who are not running an independent business and are largely or solely dependent upon you for their livelihood.
EXAMPLE: Joe the tailor abandons his own tailor shop when he’s hired to perform full-time tailoring services for Acme Suits, a large haberdashery chain. Joe is completely dependent upon Acme for his livelihood. Acme managers undoubtedly have the right to give Joe instructions, even if they don’t feel the need to do so because Joe is such a good tailor.
A hiring firm may give an IC detailed guidelines as to the end results to be achieved. For example, a software programmer may be given highly detailed specifications describing the software programs to develop; or a building contractor may be given detailed blueprints showing precisely what the finished building should look like. Since these relate only to the end results to be achieved, not how to achieve them, they do not make the programmer or building contractor employees.
13. Sequence of Work
Employees may be required to perform services in the order or sequence set for them by the employer. ICs decide for themselves the order or sequence in which they work.
This factor is closely related to the right to give instructions. If a person must perform services in the order or sequence set by the hiring firm, it shows that the worker is not free to use discretion in working, but must follow established routines and schedules.
Often, because of the nature of the occupation, the hiring firm either does not set the order of the services or sets them infrequently. It is sufficient to show control, however, if the hiring firm retains the right to do so. For example, a salesperson who works on commission is usually permitted latitude in mapping out work activities. But one who hires such a salesperson normally has the discretion to require him or her to report to the office at specified times, follow up on leads and perform certain tasks at certain times. Such requirements interfere with and take precedence over the salesperson’s own routines or plans. They indicate control by the hiring firm and employee status for the salesperson.
14. Training
Employees may receive training from their employers. ICs ordinarily receive no training from those who purchase their services.
Training may be done by teaming a new worker with a more experienced one, by requiring attendance at meetings or seminars or even by correspondence. Training shows control because it indicates that the employer wants the services performed a particular way. This is especially true if the training is given periodically or at frequent intervals.
ICs are usually hired precisely because they don’t need any training. They possess special skills or proficiencies that the hiring firm’s employees do not.
15. Services Performed Personally
Employees are required to perform their services on their own—that is, they can’t get someone else to do their jobs for them. ICs ordinarily are not required to render services personally; for example, they can hire their own employees or even other ICs to do the work.
Ordinarily, when you hire an IC, he or she has the right to delegate all or part of the work to others without your permission. This is part and parcel of running a business. For example, if you hire an accountant to prepare your tax return, the accountant normally has the right to have assistants do all or part of the work under his or her supervision.
Requiring someone you hire to perform the services personally indicates that you want to control how the work is done, not just the end results. If you were just interested in end results, you wouldn’t care who did the work; you’d just make sure the work was done right when it was finished.
16. Hiring Assistants
Employees hire, supervise and pay assistants only at the direction of the employer. ICs, on the other hand, hire, supervise and pay their own assistants without input from the hiring firm.
Government auditors are usually impressed by the fact that a worker hires and pays his or her own assistants. This is something employees simply do not do and is strong evidence of IC status because it shows risk of loss if the worker’s income does not match payroll expenses.
17. Set Working Hours
Employees ordinarily have set hours of work. ICs are masters of their own time; they ordinarily set their own work hours.
18. Working Full Time
An employer might require an employee to work full time. ICs are free to work when and for whom they choose—and usually have the right to work for more than one client or customer at a time.
19. Oral or Written Reports
Employees may be required to submit regular oral or written reports to the employer regarding the progress of their work. ICs are generally not required to submit regular reports; they are responsible only for end results.
Submitting reports shows that the worker is compelled to account for individual actions. Reports are an important control device for an employer. They help determine whether directions are being followed and whether new instructions should be issued.
This requirement focuses on regular reports that enable an employer to keep track of employees’ day-to-day performance. It’s quite common for ICs to make infrequent interim reports to hiring firms when they are working on long or complex projects. Such reports are typically tied to specific completion dates, timelines or milestones written into the contract. For example, a building contractor may be contractually required to report to the hiring firm when each phase of a complex building project is completed.
20. Integration Into Business
Employees typically provide services that are an integral part of the employer’s day-to-day operations. In contrast, an independent contractor’s services are usually outside the operation.
Integration in this context has nothing to do with race relations. It simply asks whether the worker is a regular part of the hiring firm’s overall operations. According to most government auditors, the hiring firm would likely exercise control over integrated workers because they are so important to the success of the business.
EXAMPLE: Fry King is a fast food outlet. It employs 15 workers per shift who prepare and sell the food. Jean is one of the workers on the night shift. Her job is to prepare all the French fries for the shift. Fry King would likely go out of business if it didn’t have someone to prepare the French fries. French fry preparation is a regular or integral part of Fry King’s daily business operations.
On the other hand, ICs generally have special skills that the hiring firm calls upon only sporadically.
EXAMPLE: Over the course of a year, Fry King hires a painter to paint its business premises, a lawyer to handle a lawsuit by a customer who suffered from food poisoning and an accountant to prepare a tax return. All of these things may be important or even essential to Fry King—otherwise it wouldn’t have them done—but they are not a part of Fry King’s normal overall daily operations of selling fast food.
21. Skill Required
Workers whose jobs require a low level of skill and experience are more likely to be employees. Workers with jobs requiring high skills are more likely to be ICs.
The skill required to do a job is a good indicator of whether the hiring firm has the right to control a worker. This is because you are far more likely to have control over the way low-skill workers do their jobs than you do over the way high-skill workers do their jobs.
For example, if you hire a highly skilled repair person to maintain an expensive and complex photocopier, it’s doubtful that you know enough about photocopiers to supervise the work or even tell the repair person what to do. All you are able to know is whether the results the repair person achieves meet your requirements—that is, whether the photocopier works or not.
This is not the case, however, when you hire a person to do a job that does not require high skills or training, such as answering telephones. You are likely to spell out the details of how the work should be done and are certainly capable of supervising the worker. Workers in such occupations generally expect to be controlled by the person who pays them—that is, they expect to be given specific instructions as to how to work, be required to work during set hours, be provided with tools and equipment and so forth.
For these reasons, highly skilled workers are far more likely to be ICs than low-skill workers. However, not all high-skill workers are ICs. Corporate officers, doctors and lawyers, for example, can be employees just like janitors and other manual laborers if they are subject to a hiring firm’s control.
EXAMPLE: Dr. Smith leaves his lucrative solo medical practice to take a salaried position teaching medicine at the local medical school. When Smith ran his own practice, he was an IC in business for himself. He paid all the expenses for his medical practice and collected all the fees. If the expenses exceeded the fees, he lost money. As soon as Smith took the teaching job, he became an employee of the medical school. The school pays him a regular salary and provides him with employee benefits, so he has no risk of loss as he did when he was in private practice. The school also has the right to exercise control over Smith’s work activities—for example, requiring him to teach certain classes. It also supplies an office and all the equipment Smith needs. He is no longer in business for himself.
22. Worker Benefits
Employees usually receive benefits such as health insurance, sick leave, pension benefits and paid vacation. ICs ordinarily receive no similar workplace benefits.
If you provide a worker with employee benefits such as health insurance, sick leave, pension benefits and paid vacation, it’s only logical for courts and government agencies to assume that you consider the worker to be your employee subject to your control. To keep the benefits, it’s likely that the worker would obey your orders. You’ll have a very hard time convincing anyone that a person you provide with employee benefits is not your employee.
23. Tax Treatment of the Worker
Employees have federal and state payroll taxes withheld by their employers and remitted to the government. ICs pay their own taxes.
Treating a worker as an employee for tax purposes—that is, remitting federal and state payroll taxes for the worker—is very strong evidence that you believe the worker to be your employee and that you have the right to exercise control over him or her. Indeed, one court has ruled that paying federal and state payroll taxes for a worker is a virtual admission that the worker is an employee under the common law test. (Aymes v. Bonelli, 980 F.2d 857 (2d Cir. 1992).)
24. Intent of the Hiring Firm and Worker
If it appears that the hiring firm and the worker honestly intended to create an IC relationship, it’s likely that the hiring firm would not believe it had control, nor attempt to exercise control, over the worker. One way to establish intent to create an IC relationship is for the hiring firm and IC to sign an independent contractor agreement.
On the other hand, if it appears that you never intended to create a true IC relationship and merely classified the worker as an IC to avoid an employer’s legal obligations, the worker will likely be considered an employee.
25. Custom in the Trade or Industry
The custom of classification in the trade or industry involved is an important part of the analysis. If the occupation is usually performed by employees, employee status is indicated.
EXAMPLE: The longstanding custom among logging companies in the Pacific Northwest is to treat tree fellers—people who cut down trees—as ICs. They are customarily paid by the tree, receive no employee benefits and are free to work for many logging companies, not just one. None of the logging companies withhold or pay federal or state payroll taxes for tree fellers. The fellers pay their own self-employment taxes. This longstanding custom (among other factors) is strong evidence that the workers are ICs.