Ask 11 Questions to Determine Employee/Independent Contractor Status

The IRS has issued guidance explaining how to classify a worker as employee or independent contractor (see page 5). According to the IRS, “all information that provides evidence of the degree of control and the degree of independence must be considered.” Additional information and examples may be found by clicking here, but the “[f]acts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties.” There are 11 main factors the IRS considers and based on those factors we’ve created a checklist you can use to review the classification of your workers:

Behavioral control. Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired are behavioral control factors. Ask the following two questions to determine behavioral control:

1. What instructions are given to the worker? An employer may be deemed to have sufficient behavioral control for a worker to be considered an employee even if no instructions are given but the employer has the right to control “how the work results are achieved.” All of the following are IRS examples of types of instructions about how to do work.
   
   
   1. When and where to do the work.
   2. What tools or equipment to use.
   3. What workers to hire or to assist with the work.
   4. Where to purchase supplies & services.
   5. What work must be performed by a specified individual.
   6. What order or sequence to follow.


2. What training is provided to the worker?
   A worker is more likely to be deemed an employee if he or she is “trained to perform services in a particular manner.” That’s because “independent contractors ordinarily use their own methods,” according to the IRS. Financial control. Facts that show whether the business has a right to control the business aspects of the worker’s job include how much risk or cost the worker incurs and how they are paid and whether the worker also performs services for others. Ask these five questions to determine financial control:
   
   Financial control. Facts that show whether the business has a right to control the business aspects of the worker’s job include how much risk or cost the worker incurs and how they are paid and whether the worker also performs services for others. Ask these five questions to determine financial control:


3. Does the worker incur unreimbursed business expenses? “Independent contractors are more likely to have unreimbursed expenses than are employees,” says the IRS guidance. If the worker has fixed costs that he incurs regularly regardless of whether work is performed, that is a factor favoring independence rather than employment. Note, however, that even employees can incur unreimbursed expenses so the mere presence of unreimbursed business expenses doesn’t guarantee independence.


4. Has the worker made any investment in resources needed to perform the services? The IRS instructs: “An independent contractor often has a significant investment in the facilities or tools he or she uses in performing services for someone else.” But keep in mind that such investment isn’t always needed for the job performed—so independent contractor status can exist without it. It’s still a factor that, when present, supports a finding of independence.


5. Does the worker market his or her services? An independent contractor is generally free to seek out business opportunities and makes his or her services available to the relevant market—advertising, maintaining a visible presence or otherwise making an effort to promote his or her services to others.


6. How does the business pay the worker? “An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time” even if it’s supplemented by a commission payment, according to IRS guidance. On the other hand, independent contractors are usually paid a flat fee or a fee based on time and materials used to perform the service.


7. Can the worker realize a profit or loss? Similar to the payment issue is profit and loss—the worker’s risk. An independent contractor can make a profit or loss but an employee is usually guaranteed to profit from the arrangement.
   
   Type of relationship. The IRS cites four factors as evidence regarding the parties’ type of relationship. Ask these four questions to help determine the type of relationship:


8. Is there a written contract? Labeling an individual a contractor doesn’t make it so; but what the contract says can help determine if the parties intended to establish an employment or independent contractor relationship.


9. Does the business provide the worker with employee- type benefits? When a worker receives benefits such as insurance, a pension plan, vacation pay, or sick pay it generally indicates an employment relationship.


10. How long will the relationship last? “If you engage a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship,” says the IRS.


11. Are the worker’s services a key aspect of the regular business of the company? If so, it is more likely that the business will have the right to direct and control the worker’s activities and there is an employment relationship.