Independent contractors – who is an independent contractor and who is not?

The IRS Rules

The IRS has a somewhat different approach to making the distinction between an employee and an independent contractor (go here for the EEOC’s guidelines), says Walters. It looks at behavioral control, financial control, and the relationship of the parties.

Behavioral Control

The issue here is whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done—as long as the employer has the right to direct and control the work. For example:

  • Instructions—if you receive extensive instructions on how work is to be done, this suggests that you are an employee. Instructions can cover a wide range of topics, for example:
    • how, when, or where to do the work
    • what tools or equipment to use
    • what assistants to hire to help with the work
    • where to purchase supplies and services

If you receive less extensive instructions about what should be done, but not how it should be done, you may be an independent contractor. For instance, instructions about time and place may be less important than directions on how the work is performed.

  • Training—if the business provides you with training about required procedures and methods, this indicates that the business wants the work done in a certain way, and this suggests that you may be an employee.

Financial Control

These facts show whether there is a right to direct or control the business part of the work. For example:

  • Significant Investment—if you have a significant investment in your work, you may be an independent contractor. While there is no precise dollar test, the investment must have substance. However, a significant investment is not necessary to be an independent contractor.
  • Expenses—if you are not reimbursed for some or all business expenses, then you may be an independent contractor, especially if your unreimbursed business expenses are high.
  • Opportunity for Profit or Loss—if you can realize a profit or incur a loss, this suggests that you are in business for yourself and that you may be an independent contractor.

Relationship of the Parties

These are facts that illustrate how the business and the worker perceive their relationship. For example:

  • Employee Benefits—if you receive benefits, such as insurance, pension, or paid leave, this is an indication that you may be an employee. If you do not receive benefits, however, you could be either an employee or an independent contractor.
  • Written Contracts—a written contract may show what both you and the business intend. This may be very significant if it is difficult, if not impossible, to determine status based on other facts.

Operate in multiple states? That’s a real compliance challenge, but with 50×50 (50 Employment Laws in 50 States); answers are at your fingertips. Wage/hour? Leave? Child labor? Discrimination? All there in easy-to-read chart form. Get more details.


The SCOTUS Approach

The Supreme Court has said that there is no definition that solves all problems relating to the employer-employee relationship under the Fair Labor Standards Act (FLSA). The Court has also said that determination of the relation cannot be based on isolated factors or upon a single characteristic, but depends upon the circumstances of the whole activity.

The goal of the analysis is to determine the underlying economic reality of the situation and whether the individual is economically dependent on the supposed employer. In general, an employee, as distinguished from an independent contractor who is engaged in a business of his own, is one who “follows the usual path of an employee” and is dependent on the business that he serves. The factors that the Supreme Court has considered significant, although no single one is regarded as controlling are:

Continue reading…HR Daily Advisor

By Christine V. Walters, interview by HR Advisor, HR Daily Advisor

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Opinions expressed in this article are those of the author and not of The HR Gazette or its team members.
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