Unfortunately, determining whether a worker is legally an employee or an independent contractor is not always easy. Different laws use different tests to determine whether a worker is an employee of an independent contractor. However, the tests have a few things in common.
First, the worker’s agreement that he is an “independent contractor” rather than an employee is not conclusive (and is often irrelevant). Second, a critical factor is the level of control the company has over the worker and the work he performs. And third, the extent of the worker’s ability to operate his personal business independent of the company’s control.
The IRS describes these three basic considerations as “Behavioral Control,” “Financial Control,” and “Type of Relationship.”
Of course, these basic considerations are more detailed and have a number of specific factors to consider. As part of “Behavioral Control” the IRS looks at the type of instructions, the company gives the worker.
If the company tells the worker when and where to do the work, what tools to use, who to hire or use to assist in the work, where to get supplies, who must perform the work, and/or the order or sequence of the work, the worker is more likely an employee. Critical to this determination, however, is the degree of instruction.
The more detailed the instructions, the more control, and the more likely the worker is an employee. Further, if the company evaluates the quality or quantity of the worker’s work, the worker is more likely an employee. Finally, if the company provides the worker with training on how to perform the work, the worker is more likely an employee.
As to “Financial Control,” the more financially dependent the worker is on the company and the company is on the worker, the more likely the worker is an employee. The more financially independent the worker and company are, the more likely the worker is an independent contractor.
For example, if the worker has invested significant money in equipment she uses to perform the work, she is more likely an independent contractor. If she pays her own expenses in performing the work and buys her own supplies, she is more likely an independent contractor.
If she can hire other workers to perform her work for the company (and thereby increase her own profits), she is more likely an independent contractor. If she can work for several different companies at once performing similar work, she is more likely an independent contractor. If she is paid by the job rather than by the hour, and can increase her profit by being more efficient, she is more likely an independent contractor.
Finally, looking at “Type of Relationship,” the critical considerations are the permanence of the relationship and the importance of the worker’s work to the company’s business. Accordingly, the longer the worker performs the same type of work for the company, the more likely the worker is an employee.
Further, the most important the work is to the company’s business, the more likely the worker is an employee. The IRS will typically ignore an agreement – even a written agreement – between the company and the worker regarding the worker’s status. The law, not the agreement of the parties, is what governs the worker’s status.
Further information and examples can be found here and here.
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