Test of Independent Contractor Relationship
It is difficult to provide a clear definition for independent contractor that is sufficiently specific, and at the same time comprehensive enough to apply to all situations. For this reason, it is helpful to understand the various factors considered by the Internal Revenue Service (IRS) to determine whether a worker qualifies as an independent contractor or as an employee. It should be kept in mind, however, that the presence of one or more of such factors is not necessarily conclusive, and all of the factors must be taken into account.
- Continuing relationships
Employees usually are hired for a continuing, indefinite period. This generally applies even to work performed on an irregular but recurring basis, as well as to part-time, temporary, and seasonal work. An independent contractor works by the job.
- Full-time work required
An employee may be required to work or be available full time. This indicates control by the employer. An independent contractor can work when and for whom he or she chooses.
- Furnishing of tools and materials
As a general rule, employees use the means provided by the employer, while independent contractors furnish the labor and means for performing their own work.
- Hiring, supervising, and paying worker's assistants
An employee works for an employer who hires, supervises, and pays workers. An independent contractor can hire, supervise, and pay assistants under a contract that requires him or her to provide materials and labor and to be responsible only for the results.
- Integration of worker's service into employer's business operations
An employee's services are usually integrated into the business operations because the services are important to the success or continuation of the company. This indicates that the employee is subject to direction and control.
Work performed on the employer's premises is indicative of an employment relationship, an employee has no investment in the facilities used. An independent contractor has a significant investment in the facilities used in performing service for someone else.
- Making services available to the general public
An employee's services are customarily not available to the public. Individuals who make their services available to the public on a regular and consistent basis are independent contractors.
- Payment by hour, week or month
Independent contractor relationship is generally indicated where: (1) the person performs work for a lump sum; (2) payment is calculated according to quantity of work performed; or (3) compensation is based upon the amount to be disbursed in order to perform the work. On the other hand, compensation based upon time taken by a person to perform the work tends to prove a regular employment relationship.
- Payment of business expenses and/or travel expenses
Payment of mileage or other similar compensation may be used to prove the existence of an employment relationship. An employee's expenses are generally paid by an employer. This shows that the employee is subject to regulation and control. An independent contractor pays their own expenses, part of the cost of the job.
- Realization of profit or loss
An employee does not incur a profit or a loss. An independent contractor can make a profit or suffer a loss.
- Require oral or written reports
An employee can be required to submit reports to an employer, indicating a degree of control. An independent contractor usually files reports when the job ends.
- Required compliance with employer's instructions
If one has the right to control or direct the means and the manner of accomplishment of the work, a relationship exists between one and the worker, and the worker must be classified as an employee. An independent contractor relationship exists where the contractor is subject to the control of the employer only as to the results.
- Right of employer to discharge
An employee can be fired by an employer. Independent contractors cannot be fired as long as they perform in accordance with their contract specifications.
- Right of worker to terminate
An employee can quit his or her job at any time without incurring liability. An independent contractor is responsible for the satisfactory completion of a specific job or might be liable for a breach of contract.
- Services required to be rendered personally
An employee renders services personally. This shows that the employer is interested in the methods as well as the results. An independent contractor can substitute another's services without the employer's knowledge.
- Set hours of work
A requirement that individuals adhere to certain work hours indicates an employee. An independent contractor generally can set his or her own work hours.
- Set order or sequence of work
An employee may be required to perform work in a certain order or sequence. This shows that they are subject to direction and control. An independent contractor sets his or her own schedule.
- Training of worker by employer
Requiring that an individual be trained through such methods as working with an experienced employee or attending training courses, is indicative of employee status because it shows that the employer wants to control the way the work is done or the method used. Independent contractors use their own methods and receive no training from the purchases of their services.
- Working for more than one firm or company at a time
A worker who performs services for more than one person may be an employee of each of the persons, particularly where such persons are part of the same service arrangement. An independent contractor provides service to two or more unrelated persons or firms at the same time.
- Working on the employer's premises
Work performed on the employer's premises is indicative of an employee relationship. Conversely, if the work is performed on the contractor's premises, it indicates an independent contractor relationship.
Last updated: July 10, 2015