Employee or Independent Contractor - The Test Used to Determine-Part 1 of 3

Thursday, May 28, 2015
By George F. Indest III, J.D., M.P.A., LL.M, Board Certified by the Florida Bar in Health Law

We are often asked by medical groups, health care clinics, and other care providers whether they are legally allowed to treat those working for them as independent contractors.  In attempting to determine whether an individual may be treated as an independent contractor or an employee, it is useful to apply the Internal Revenue Service (IRS) "20 Factor Test."  

Many businesses prefer to treat individuals providing services for the business as independent contractors.  Employers are not required to pay Medicare or Social Security taxes on independent contractors.  Employers are not required to withhold Federal income taxes or unemployment compensation taxes from the pay of an independent contractor.  Businesses are generally not liable for the acts or negligence of an independent contractor.  Businesses do not need to worry about matters such as minimum wages or overtime pay for independent contractors.  

In this 3-part blog, we will examine tests and factors used to determine whether a worker should be classified as an employee instead of an individual contractor. Click here to read Part 2 of 3.
Legal Problems in Treating Employees as Independent Contractors.

Many businesses may mistakenly treat an individual providing services as an independent contractor when that person should actually be treated as an employee.  This mistake may lead to significant repercussions.  The Department of Labor may temporarily shut down the business, also referred to as a "cease work order," if the business is illegally treating employees as independent contractors.  The IRS may assess fines and penalties for unpaid taxes and failure to collect Federal income taxes withheld (FITW) if an employee is incorrectly treated as an independent contractor.  Employees may sue the business for failure to pay minimum wage, unpaid wages, unpaid overtime, paid employer taxes and others, if the business has legally treated the employee as an independent contractor.

You can avoid these problems by knowing when to treat an individual providing services as an employee and when to treat an individual as an independent contractor.

Control Over the Individual Performing the Work is the Key.

Tests to determine whether an individual may legally be treated as an independent contractor instead of as an employee are usually based on the degree of control that the business exercises over the individual.  When one applies the 20 Factor Test or any other test, one is usually measuring the degree of control the employer has over the acts of the individual.

When using such tests as the IRS 20 Factor Test, the worker does not have to meet all 20 of the criteria to be qualified as an employee.  No one single factor is decisive in determining whether or not the worker is an employee or an independent contractor.

The IRS 20 Factor Test.

The following 10 factors are taken from IRS guidelines and publications:
1. Level of instruction. If the company directs when, where and how work is done, this control indicates a possible employment relationship.

2. Amount of training. Requesting workers to undergo company-provided training suggests an employment relationship since the company is directing the methods by which work is accomplished.
3. Degree of business integration. Workers whose services are integrated into business operations or significantly affect business success are likely to be considered employees.
4. Extent of personal services. Companies that insist on a particular person performing the work assert a degree of control that suggests an employment relationship. In contrast, independent contractors typically are free to assign work to anyone.
5. Control of assistants. If a company hires, supervises and pays a worker's assistant, this control indicates a possible employment relationship. If the worker retains control over hiring, supervising and paying helpers, this arrangement suggests an independent contractor relationship.
6. Continuity of relationship. A continuous relationship between a company and a worker indicates a possible employment relationship. However, an independent contractor arrangement can involve an ongoing relationship for multiple, sequential projects.
7. Flexibility of schedule. People whose hours or days of work are dictated by a company are apt to qualify as its employees. 
8. Demands for full-time work. Full-time work gives a company control over most of a person's time, which supports a finding of an employment relationship.
9. Need for on-site services. Requiring someone to work on company premises - particularly if the work can be performed elsewhere - indicates a possible employment relationship.
10. Sequence of work. If a company requires work to be performed in specific order or sequence, this control suggests an employment relationship.
For the remainder of the 20 factors, check out Part 2 of this blog.


Do you think the IRS 20 Factor Test is useful to determine whether an individual may be treated as an employee or an independent contractor? Are the first 10 tests listed above sufficient enough guidelines? Please leave any thoughtful comments below.

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