The Internal Revenue Service has a strict definition of the difference between an employee and an independent contractor. To make sure that you are compliant with the legal definition so that you can mitigate your risk, apply this common law test to your IC relationships.
1) Who Is In Control?
A worker is considered a common law employee if you as the employer have the right to control, direct, and instruct the worker on the job he is to perform and how he is to complete the job. It is important to realize that it does not matter whether or not you act on this right. Even if you do not exercise this privilege, if you have the right to control the worker in this way, the worker is an employee and not an IC.
2) Are the Worker’s Wages Protected?
Common law employees are paid for their time, and for as long as they work for you, their wages are protected whether or not your business succeeds. Independent contractors profit from performing specific tasks or projects. They have no guaranteed wage protection and run the risk of profit loss at any time.
3) Does the Worker Invest in the Company?
Employees are not required to invest in your business, whereas ICs must make investments in supplies, equipment, facilities, etc. to perform their work.
4) Did You Have to Train the Worker?
Employees often receive training to perform their job. ICs do not need additional training and will already have the skills to complete the jobs they choose.
5) Do You Have a Continuing Relationship?
Your relationship with your employees will automatically continue indefinitely until the worker’s employment status is terminated. Your relationship with an independent contractor will automatically terminate upon their completion of a project. You can continue to offer an IC additional work as though you have a continuing relationship, but the IC can accept or reject projects at his own will.
6) How Essential is the Worker?
An employer provides essential services for your company, and these may be incorporated into other services and products. An IC performs services that help your business succeed but are not essential or critical to your business’s success.
When considering these questions, look at your entire relationship with your workers. A single factor will not necessarily determine employee versus IC status on its own, and the answers to any of the above questions may change in different situations. Consider your entire relationship with your workers, answer all of the above questions, and document your answers clearly to minimize your risk.
Consultech has been assisting businesses with proper classification, documentation, and restructuring of business relationships for nearly 30 years. We can help you document your IC relationships, mitigate your risk against lawsuits or regulatory claims, and forestall any inquiries or claims from any attorney or government agency. Call (800) 769-2994 or email [email protected] to contact us today.