Overview of Legal Tests For Determining Whether a Worker Is an Employee or an Independent Contractor

The basic tests used by the IRS, the Department of Labor and the courts for determining whether workers are properly classified as employees or independent contractors are:

The "Right-to-Control" Test

If the business has the right to control the manner in which the worker performs the services, the worker is an employee. If not, the worker is an independent contractor.

The "Economic Reality" Test

If, as a matter of economic reality, the worker is dependent on the business for which he or she is performing services, the worker may be classified as an employee. The basic question is whether the worker is in business for himself or herself.

To apply these tests, the IRS focuses on three basic areas of inquiry: Behavioral Control, Financial Control, and Relationship of the Parties

In each of these areas, the IRS applies a number of different factors based on the specific facts of each case. No one factor is dispositive, and the nature of the relationship must be ascertained from an overall view of the facts.

Behavioral Control -- How the worker performs the tasks for which he or she is hired.

Instructions

If a worker must comply with the business' instructions about when, where and how to work, the worker might be considered an employee.

Training

A worker who uses his or her own methods to perform a job and receives no training from the business that hires him or her might be considered an independent contractor.

Financial Control -- How the business aspects of the worker's activities are conducted.

Significant Investment in Facilities

If a worker maintains an office, studio, shop or other place of business at which he or she performs services for a business, this is strong evidence that he or she is an independent contractor.

Payment of Business-Related Expenses

If a business pays a worker's expenses, this suggests that he or she is an employee, rather than an independent contractor.

Making Services Available to General Public

A worker who does not hold himself or herself out to the public for work in his or her field looks like an employee.

Method of Payment of Worker

Employees generally are paid by the hour, week, or month, while independent contractors usually do one or more pieces of work for a fixed price or fee based on the quantity of the work, and normally are paid by the job or on a straight commission.

Opportunity for Profit and Loss

If a worker does not realize a profit or loss, but receives a set wage, he or she might be considered an employee, whereas the presence of a chance for profit or a risk of loss suggests that the worker is an independent contractor.

Written Contractual Designation of Worker's Status

In determining a worker's relationship to a business, courts examine the parties' intent for the worker's status and will look at written agreements as evidence of the parties' intent.

Incorporation by Worker

Under recent IRS guidelines, a worker who has created a corporation through which he or she provides services for another party is considered an independent contractor if the corporate formalities are followed and at least one non-tax purpose exists for the corporation.

Employee Benefits

If a worker is covered under a business' liability insurance, workers compensation, health insurance, licenses and bonds, and is provided other benefits given to regular employees, the worker probably will be considered an employee.

Right to Fire

If a worker can be fired, for reasons other than unsatisfactory performance, then he or she looks like an employee. If a worker cannot be fired as long as he or she produces a result that meets the requirements of the contract, the worker might be considered an independent contractor.

Right to Quit

If a worker may quit without consequences, he or she looks like an employee. If a worker has an agreement with a business to complete a specific job and is responsible for its satisfactory completion, so that he or she would be liable for failure to complete it, the worker probably will be considered an independent contractor.

Continuing Relationship

If a business engages a worker with the expectation that the relationship will continue for an indefinite period of time, he or she probably will be considered an employee.

Integration into Business Operations

If a worker's services are a key aspect of a business' regular business functions, he or she probably will be considered an employee.

Not mentioned in current IRS guidelines, but still useful to consider for employee benefit plan coverage issues.

Services Rendered Personally

If a worker is allowed to hire a substitute or any other labor necessary to perform a job, he or she might be considered an independent contractor.

Hiring, Supervising and Paying Assistants

If a worker is free to use such assistants as he or she may think proper and has full control over these assistants, the worker might be considered an independent contractor.

Order or Sequence of Services Set by Employer

If a worker can be required to perform services in the order or sequence set by a business, this shows that the worker is subject to the business' direction and control and the worker might be considered an employee.

Oral or Written Reports

If a worker is required to submit reports to a business, this shows that the business maintains a degree of control and the worker might be considered an employee.

Furnishing of Tools, Materials and Equipment

An employer normally provides an employee with any necessary tools, materials and equipment.

The purpose of this Web site is to provide general information about legal developments. Because the facts in each situation vary, any legal precedents noted may not be applicable to individual circumstances. This information is not offered as legal advice.