OVERVIEW OF LEGAL TESTS FOR DETERMINING WHETHER

A WORKER IS AN EMPLOYEE OR AN INDEPENDENT CONTRACTOR



The basic tests used by the IRS, the Department of Labor and the courts for determining whether workers are properly classified as employees or independent contractors are:

If the business has the right to control the manner in which the worker performs the services, the worker is an employee. If not, the worker is an independent contractor.

If, as a matter of economic reality, the worker is dependent on the business for which he or she is performing services, the worker may be classified as an employee. The basic question is whether the worker is in business for himself or herself.

To apply these tests, the IRS focuses on three basic areas of inquiry: Behavioral Control, Financial Control, and Relationship of the Parties

In each of these areas, the IRS applies a number of different factors based on the specific facts of each case. No one factor is dispositive, and the nature of the relationship must be ascertained from an overall view of the facts.

Behavioral Control-How the worker performs the tasks for which he or she is hired.

If a worker must comply with the business' instructions about when, where and how to work, the worker might be considered an employee.



A worker who uses his or her own methods to perform a job and receives no training from the business that hires him or her might be considered an independent contractor.





Financial Control-How the business aspects of the worker's activities are conducted.



If a worker maintains an office, studio, shop or other place or business at which he or she performs services for a business, this is strong evidence that he or she is an independent contractor.

If a business pays a worker's expenses, this suggests that he or she is an employee, rather than an independent contractor.

A worker who does not hold himself or herself out to the public for work in his or her field looks like an employee.

Employees generally are paid by the hour, week, or month, while independent contractors usually do one or more pieces of work for a fixed price or fee based on the quantity of the work, and normally are paid by the job or on a straight commission.

If a worker does not realize a profit or loss, but receives a set wage, he or she might be considered an employee whereas the presence of a chance for profit or a risk or loss suggests that the worker is an independent contractor.

Relationship of the Parties-How the parties perceive their relationship.

In determining a worker's relationship to a business, courts examine the parties' intent for the worker's status and will look at written agreements as evidence of the parties' intent.

Under recent IRS guidelines, a worker who has created a corporation through which he or she provides services for another party is considered an independent contractor if the corporate formalities are followed and at least one non-tax purpose exists for the corporation.

If a worker is covered under a business' liability insurance, workers compensation, health insurance, licenses and bonds, and is provided other benefits given to regular employees, the worker probably will be considered an employee.

If a worker can be fired, for reasons other than unsatisfactory performance, then he or she looks like an employee. If a worker cannot be fired as long as he or she produces a result that meets the requirements of the contract, the worker might be considered an independent contractor.

If a worker may quit without consequences, he or she looks like an employee. If a worker has an agreement with a business to complete a specific job and is responsible for its satisfactory completion, so that he or she would be liable for failure to complete it, the worker probably will be considered an independent contractor.

If a business engages a worker with the expectation that the relationship will continue for an indefinite period of time, he or she probably will be considered an employee.

If a worker's services are a key aspect of a business' regular business functions, he or she probably will be considered an employee.

Other Factors

Not mentioned in current IRS guidelines, but still useful to consider for employee benefit plan coverage issues.

If a worker is allowed to hire a substitute or any other labor necessary to perform a job, he or she might be considered an independent contractor.

If a worker is free to use such assistants as he or she may think proper and has full control over these assistants, the worker might be considered an independent contractor.

If a worker can be required to perform services in the order or sequence set by a business, this shows that the worker is subject to the business' direction and control and the worker might be considered an employee.

If a worker is required to submit reports to a business, this shows that the business maintains a degree of control and the worker might be considered an employee.

An employer normally provides an employee with any necessary tools, materials and equipment.

Louis B. Meyer III is a partner with Poyner & Spruill practicing in the Raleigh office. He received his Bachelor of Arts and Juris Doctorate degrees from Wake Forest University where he was a member of the Wake Forest Law Review. Mr. Meyer practices in the firm's Health Care, Professional Liability and Employment Law Sections. He has extensive experience in cases involving independent contractors and departing employees, including enforcement of non-compete covenants, protection of trade secrets and litigation of other business disputes. Mr. Meyer is a certified mediator and a member of the North Carolina and Wake County Bar Association. He may be reached at (919) 783-2810. Reprinted with permission from Louis B. Meyer, III and Poyner & Spruill, L.L.P.