| There are many important distinctions between the way that hiring parties must treat employees and independent contractors. For example, hiring parties must withhold payroll taxes for their employees, but not for independent contractors. Independent contractors are also not entitled to be covered by employer benefit plans. Although the differences in required treatment are great, the distinction between an employee and an independent contractor is not often so easily drawn. Thus, a hiring party that incorrectly classifies its workers can incur great legal liability.
Common Law Test
Typically courts use some form of the common law "right to control" test in order to determine the status of a worker. This test usually focuses on whether the hiring party has the right to control the worker's activities, including hours of work, duration of work, and the use of certain instruments or tools. In most cases, if a hiring party has the right to control the result, but not the means and methods of obtaining the result, the worker is an independent contractor
Internal Revenue Service Guidelines
The Internal Revenue Service (IRS) has created its own guidelines to explain the "right to control" test. Where there is sufficient evidence of control, a worker is an employee. Among the 20 factors considered by the IRS are:
- Whether the worker is required to comply with another person's instructions (usually evidence of control);
- Whether the worker is required to work full time (generally indicates control);
- Whether the worker can make a profit or suffer a loss (typically shows a lack of control);
- Whether set hours of work have been established (shows control);
- Whether a right to discharge exists (evidence of control); and
- Whether the worker hires his or her own assistants (evidence of a lack of control).
Statutory employees
In some cases, where a worker would be considered an independent contractor under the common law "control" test, federal law requires that the workers be treated as employees for employment tax purposes (but not for income tax withholding purposes). The four categories of statutory employees are:
- Full-time life insurance agents;
- Drivers who distribute beverages (other than milk), meat, or bakery products and are paid on commission;
- People who work from home on materials or goods that are supplied by an employer, where the employer furnishes the specifications for the work to be done; and
- Traveling or city salespersons who work for a single supplier.
Statutory Nonemployees
Under federal law, direct sellers and licensed real estate agents are treated as independent contractors for all federal tax purposes, including income and employment taxes, if:
- Substantially all of their wages are directly related to their sales; and
- Their services are performed under a written contract stating that they will not be treated as employees for federal tax purposes.
Fair Labor Standards Act
The Fair Labor Standards Act, which sets minimum wage and overtime pay requirements, applies only to employees. Factors considered in determining whether a person is an employee under the Act are similar to those considered under the common law. They include the degree of the hiring party's right to control the manner in which the work is performed and the worker's investment in equipment or materials required for the work. Copyright 2010 LexisNexis, a division of Reed Elsevier Inc. |