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An overview of the irs common law test and the dol economic realities test used to determine whether a worker is an employee or an independent contractor. The tests focus on three categories (behavioral control, financial control, and relationship of parties) and six factors (integral part of business, managerial skills, relative investment, specialized skills and initiative, permanency of relationship, and nature and degree of employer control) respectively.
Typology: Exercises
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IRS Common Law Test for determination and classification as employee vs. independent contractor is organized into three major categories:
Behavioral Control: Who controls how the work is done?
BEHAVIORAL CONTROL EMPLOYEE INDEPENDENT CONTRACTOR Instructions An employer has the right to give an employee instructions regarding how, when and where the work is performed.
The client has a right to specify the parameters of the deliverables; not the details of how, when and where the work is performed. Training Employees are often trained to do their jobs. Independent Contractors are hired for their expertise and should receive no internal training.
Financial Control : Who controls the business aspects of the worker’s assignment?
FINANCIAL CONTROL EMPLOYEE INDEPENDENT CONTRACTOR Significant Investment Employers provide the tools and equipment necessary for their employees.
Independent Contractors provide their own tools and equipment. Unreimbursed Expenses Employees are reimbursed for any out-of-pocket business expenses they might incur.
Independent Contractors pay their own business expenses.
Marketing Employees do not market their services to public. Independent Contractors market their services to the public. Method of Payment Employees are paid based upon the passage of time— guaranteed return for his/her labor.
Independent Contractors are generally to be paid upon the completion of specific deliverables. Opportunity for Profit/Loss Employees generally have no opportunity for suffering a loss.
Independent Contractors make business decisions that allow them to not only make a profit but also have the opportunity to suffer a loss.
Relationship of Parties : Worker’s and employer’s/purchaser’s type of relationship
RELATIONSHIP OF PARTIES EMPLOYEE INDEPENDENT CONTRACTOR Intent of Parties Expressed via employment contract; extent of direction and control the employer requires over the employee.
Expressed in a contract between the two parties; Independent Contractor expresses his/her intent by fulfilling local and state requirements for business (e.g., securing business license, etc.) Employee Benefits Employees are entitled to benefits such as vacation or sick time, health care benefits and ability to attend company sponsored events.
Independent Contractors provides his/her own benefits.
Termination Within the confines of legal or contractual requirements employees can be discharged at will by the employer.
Contracts can only be terminated according to the specifications of the contract. Non-performance on the part of the contractor or client can lead to legal recourse. Permanency of Relationship Employer engages for indefinite period of time. Specific services are for limited period of time. Regular Business Activity Employees perform services that are key aspects of employer’s regular business activities.
Independent contractors perform services which do not affect client’s bottom line. (limited exceptions)
DOL Economic Realities Test : Determination and classification of an employee vs. independent contractor is based on these six factors:
ECONOMIC REALITIES TEST FACTOR EMPLOYEE INDEPENDENT CONTRACTOR
If the work is integral, it is more likely that the worker is economically dependent on the employer
If the work is not integral, it is less likely that the worker is economically dependent on the employer.
Worker has no opportunity to increase profit except by increasing hours.
Worker hires others; purchases materials and equipment for the job; advertises; rents spaces; manages timetables
Worker is NOT economically dependent on payments from the University.
The DOL does not consider specialized skills unless they indicate that a worker is in business for himself/herself.
The DOL only considers business skills, business judgment and business initiative as relevant to independent contractor status.
Independent contractors are not permanent and should not have an indefinite term.
Controlling one’s hours, working at home, and having little supervision are common for employees.
An independent contractor controls meaningful aspects of the work performed, and must conduct his or her own business.