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Preliminary Considerations

Is a Worker an Employee or an Independent Contractor?

As will be seen in the following pages, when a worker is considered an employee, the worker's employer assumes certain obligations to both the employer and the government. What if a person who provides services to another is not an employee, but rather is in some type of classification other than an employee? Not all working relationships meet the requirements of an employer-employee relationship, and other relationships are recognized. Some employers try to classify their relationships under one category or the other to gain what they believe to be an advantage over the other relationship. The following discussion examines three of the main rules that distinguish the relationship of an employer-employee from that of an employer-independent contractor. These rules relate to important concepts about the nature of the workplace relationship and the importance of clarifying the relationship before a worker begins work.

A. Common Law
In common law, the prevailing distinction between an employer and those workers who provide a service to the employer was couched in terms of master-servant and principal and agent relationships. In defining the terms "master" and "servant," the central distinction focused on the right of the master to control the worker's physical performance of a desired service. If the master retained the right to control the physical conduct of the worker while performing assigned duties, the worker was classified as a servant. The absence of the master's right to control resulted in classifying the worker as an independent contractor.

In determining whether a worker is a servant or an independent contractor, several factors are considered, such as the following:

The extent of control the master may exercise over the details of the work.
Whether the one employed is engaged in a distinct occupation or business.
The kind of occupation with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision.
The skill required in the particular occupation.
Whether the employer or the worker supplies the tools and the place where work is performed.
The length of time for which the person is employed.
The method of payment, whether by the time or by the job.
Whether the work is part of the regular business of the employer.
Whether the parties believe they are creating the relation of master and servant.
Whether the master operates a business.

B. The Internal Revenue Code
As will be seen in later pages, the Internal Revenue Code imposes obligations on employers to withhold a portion of an employee's pay as income tax withheld. In addition, the employer pays an additional amount that is based on the employee's earnings toward the employee's withheld income taxes. In this situation the burden of the income tax is shared between the employer and employee. If the relationship is that of an employer-independent contractor, the contractor is responsible for paying all income taxes without sharing with anyone else. Therefore, the relationship of employer-employee triggers important tax-paying obligations. Under current tax law, the relationship of employer and employee exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work, but also as to the details and means by which that result is accomplished. Employees are those who are subject to the will and control of an employer, not only as to what is done, but also how it is done. It is not necessary that the employer actually direct or control the manner in which the services are performed, it is sufficient if the employer has the right to do so. If the employer-employee relationship exists, the description that the parties give to it will be of no consequence.

In agricultural relationships, there have been a variety of relationships that have not been considered employer-employee relationships, such as crop-share rental arrangements, which are not considered to be employer-employee relationships. In such cases, two or more parties produce agricultural commodities on a parcel of land owned by one of them. One party plants and manages the production and all parties agree to share the production between the landowner and the production manager. In many cases, the amount of the share is dependent on the volume produced. In those cases the worker is considered to be self-employed and not an employee.

As an aid to deciding whether an individual is an employee, the Internal Revenue Service has listed twenty factors or elements that can be used as a guide to determine whether sufficient control is present to be an employer-employee relationship. Among all of the factors, the importance to be given to any one of them will vary according to the occupation performed and the factual context in which the service is performed. These 20 factors are:

Instructions. Control is present if the person for whom the services are performed has the right to require compliance with instructions.
Training. Training a worker through various means indicates that the person for whom the services are provided wants the services to be provided in a particular method or manner.
Integration. Integration of the worker's services into the business operations of the person for whom the services are provided generally shows that the worker is subject to direction and control. If the success or continuation of a business depends upon the performance of certain services, the workers who perform those services must necessarily be subject to a certain amount of control by the owner of the business.
Rendering services personally. If services must be performed personally, it is presumed that the person for whom the services are performed is interested in the methods used to accomplish the results.
Hiring, supervising, and paying assistants. If the person for whom the work is performed hires, supervises, and pays assistants to work with the person who provides the service, this factor generally indicates control over the workers on the job. If the person performing the work performs these tasks, that factor is indicative of an independent contractor.
Continuing relationship. A continuing relationship, even one that occurs at frequent yet regular intervals, is indicative of an employer-employee relationship.
Set hours of work. The establishment of set hours of work by the person for whom services are performed is a factor indicating control.
Full time required. A worker who must devote substantially full time to providing service to another is implied under the control of the person for whom the services are provided.
Doing work on the employer's premises. Work performed on the premises of the person for whom the services are performed is generally under the control of that person. This fact alone is not indicative, however.
Order of sequence set. The person who establishes the order or sequence in which work is to be done generally has the authority to control the person who provides the service.
Oral or written reports. Requiring regular or written reports to the person for whom the work is provided is indicative of a degree of control over the worker.
Pay by the hour, week, or month. These facts point to an employer-employee relationship, provided that the method of payment is not just a convenient way to pay a lump sum agreed upon as the cost of the job.
Payment of business and/or travel expenses. Payment of these expenses is generally indicative of an employer-employee relationship.
Furnishing tools and materials. Supplying significant tools, materials, and other equipment tends to show the existence of an employer-employee relationship.
Significant investment. A worker's significant investment in the facilities used to perform the services indicates an independent contractor relationship.
Realizing profit or loss. A worker who can realize a profit or suffer a loss as a result of the worker's actions is generally an independent contractor. However, the risk that a worker will not receive payment for services provided is a risk that is common to employees and independent contractors.
Working for more than one firm. Performing more than de minimis services for a multitude of unrelated persons at the same time is generally indicative of an independent contractor.
Making services available to the public. Making services available to the general public on a regular and consistent basis is indicative of an independent contractor.
Right to discharge. Having the right to discharge a worker is indicative of the right of an employer.
Right to terminate. If a worker has the right to end his or her relationship with the person to whom the work is provided, at any time and without incurring liability, that is indicative of an employer-employee relationship.

C. The Fair Labor Standards Act of 1938
As later discussions will show, the Fair Labor Standards Act governs minimum wages, overtime pay, employer record keeping, and child labor issues. In determining whether a worker is an employee or an independent contractor for the many issues in which the answer to the question is important, the U.S. Department of Labor applies an "Economic Reality" test to the facts of the relationship between the person providing service and the person to whom it is provided. Under this test the following factors are considered:

The degree to which the worker has the right to control the results to be accomplished (What shall be done?) and the manner in which the work is to be performed (How shall it be done?).
The degree to which the employer determines the worker's opportunity for profit and loss.
The degree of skill, training, and independent initiative required to perform the work.
The permanency, exclusivity, or duration of the working relationship.
The extent to which the work is an integral part of the employer's business.
The extent of the worker's investment in equipment or materials required for his or her task.

Among these factors, no single factor is considered to be controlling. Additional factors, such as the intent of the parties and the terms of any contract or agreement, are also considered. In analyzing the factors, the central question to be answered is whether, under the facts and circumstances of the total situation, including the risk undertaken, control exercised and the opportunity for profit from sound management, the economic reality is that the worker can be characterized as an independent contractor rather than an employee.