Employee Versus Contractor

This is an area that is getting more and more scrutiny from the IRS and the State of California Employment Development Department. Some employers have the false believe that they can get around the law by having the prospective workers sign a contract that simply states that the worker is liable for their own taxes. I have seen some cases where the employer actually had their attorney draw up this employment agreement. The problem is you can’t write a contract that violates the law. The IRS uses the following 20 tests to determine if someone is an employee or contractor:

  1. Does the employer train the worker?
  2. Must the worker follow the employers instructions on how, when and where the work is to be done?
  3. Does the business furnish tools and materials in order that the work can be performed?
  4. Is there a continuing relationship or does the relationship end when the job has been completed?
  5. Does the employer reimburse for business or travel expenses?
  6. Are the worker’s services made available to the public?
  7. Is the worker allowed to make a profit or take a loss on the services performed?
  8. Does the business set work schedules?
  9. Must the worker work full time for the business?
  10. Is the work done at the company or at sites designated by the company?
  11. Is the worker paid on a commission basis versus hourly or salary?
  12. Does the worker need to provide regular reports?
  13. Does the company hire assistants to help the worker?
  14. Must the work be rendered personally or can the worker have someone else perform the services?
  15. Can the worker face a liability if the work isn’t completed?
  16. Has the worker invested in equipment or facilities used to provide the service?
  17. Does the worker perform services exclusively for the business?
  18. Are the employees services an integral part of the business?
  19. Does the company tell the worker in which sequence the work must be done?
  20. Can the worker be terminated for reasons other than non-performance?

These tests can be boiled down to:

  1. Who controls the worker’s time?
  2. Can you show that the worker has other clients?
  3. Must the work be done on the premises?

Making the wrong decision on whether someone is an employee or an independent contractor can have some unpleasant consequences. The company could be forced to pay back-payroll taxes along with hefty interest and penalties. If the company has a pension plan the company can find the employer liable for funding the plans for the time period that the government agencies consider the worker was actually an employee. Lastly it only requires the failure of one of these 20 tests for the worker to be ruled an employee.