The Twenty (20) Common-Law Factors Determining Employee or Common-Law
Independent Contractor Status.
The Internal Revenue Service has enumerated twenty (20) factors in Revenue
Ruling 87-41 which it considers in determining whether individuals are employees
or common-law independent contractors for federal tax purposes. The degree of
importance of each factor depends on the occupation and is case specific. When
evaluating each of these twenty (20) factors in light of your office practices,
remember that a "yes" for a factor weighs in favor of assessing a worker as an
employee. The twenty (20) factors are below:
1. Instructions.
Is the worker required to comply with the employer's instructions?
A worker who is required to comply with other persons' instructions about when,
where, and how he is to work is ordinarily an employee. This control factor is
present if the person for whom the services are performed has the right to
require compliance with instructions.
2. Training.
Is the worker required to receive training from the employer?
Training a worker by requiring an experienced individual to work with him or by
requiring the worker to attend meetings, or by using other methods, indicates
that the services are to be performed in a particular method or manner.
3. Integration.
Does the worker provide services that are integrated into the business?
Integration of the worker's services into the business operations generally
shows that the worker is subject to direction and control. When the success or
continuation of a business depends on the performance of certain services, the
workers who perform those services are generally subject to a certain amount of
control by the owner of the business.
4. Services Rendered Personally.
Must the worker personally perform the services?
If the services must be rendered personally, an employer-employee relationship
is assumed.
5. Hiring, Supervising and Paying Assistants.
Does the worker hire, supervise and pay assistants for the employer?
If the person for whom the services are performed hires, supervises and pays
assistants, it generally demonstrates control. However, if one worker hires,
supervises and pays the other assistants pursuant to a contract under which the
worker agrees to provide materials and labor and under which the worker is
responsible only for the attainment of a result, this factor indicates an
independent contractor status.
6. Continuing Relationship.
Does the worker have a continuing relationship with the employer?
A continuing relationship between the worker and the person for whom the
services are performed indicates an employer-employee relationship. A continuing
relationship may exist where work is performed at irregular intervals if they
are recurring.
7. Set Hours of Work.
Must the worker follow set hours of work?
The establishment of set hours of work by the person for whom the services are
performed is a factor indicating control.
8. Full-Time Required.
Does the worker work full-time for the employer?
If the worker must devote substantially full-time to the job, control over the
amount of time the worker spends working is assumed and restricts the worker
from other gainful employment. Therefore, an employer-employee relationship is
assumed. An independent contractor, on the other hand, is free to work when and
for who he or she chooses.
9. Doing Work On Employer's Premises.
Does the work take place on the employer's premises?
If the work is performed on the premises of the person for whom the services are
performed, that factor suggests control, especially if the work could be done
elsewhere. Work done off premises, such as at the office of the worker,
indicates some freedom from control. However, this fact by itself does not mean
that the worker is not an employee. Control over the place of work is indicated
when the person for whom the services are performed has the right to compel the
worker to travel a designated route or to canvass a designated territory.
10. Order or Sequence Set.
Does the worker have to follow a work sequence set by the employer?
If a worker must perform services in the order or sequence set by the person for
whom the services are performed, that factor shows that the worker must follow
established routines and schedules. Often, because of the nature of an
occupation, the person for whom the services are performed does not set the
order of the services. It is sufficient to show control, however, if the person
has the right to do so.
11. Oral or Written Reports.
Does the worker have to submit regular reports?
A requirement that the worker submit regular or written reports to the person
for whom the services are performed indicates a degree of control.
12. Payment by Hour, Week, Month.
Does the worker receive regular amount of compensation at fixed intervals?
Payment by the hour, week or month generally points to an employer-employee
relationship, provided that this method of payment is not just a convenient way
of paying a lump sum agreed upon as the cost of a job. Payment made per job or
on a straight commission basis generally indicates that the worker is an
independent contractor.
13. Payment of Business and/or Traveling Expenses.
Does the worker receive payment for business and traveling expenses?
If the person for whom the services are performed pays the worker's business
and/or traveling expenses, the worker is ordinarily an employee.
14. Furnishing of Tools and Materials.
Does the employer furnish tools and materials?
The fact that the person for whom the services are performed furnishes
significant tools, materials, and other equipment to do the job tends to show
the existence of an employer/employee relationship.
15. Significant Investment.
Has the worker invested in facilities used to perform the service?
If the worker invests in facilities that he uses in performing services which
are not generally maintained by employees (such as the maintenance of an office
rented at fair market value from an unrelated party), that factor tends to
indicate that the worker is an independent contractor. The lack of investment in
facilities indicates dependence on the person for whom the services are
performed and the existence of an employer-employee relationship.
16. Realization of Profit of Loss.
Can the worker make a profit or suffer a loss?
A worker who can realize a profit or suffer a loss is generally an independent
contractor. For example, if the worker is subject to a real risk of economic
loss due to significant investments or liability for expenses, such as salary
payments to unrelated employees, that factor indicates that the worker is an
independent contractor. The risk that a worker will not receive payment for his
or her services, however, is common to both independent contractors and
employees and thus does not constitute a sufficient economic risk to support
treatment as an independent contractor.
17. Working for More Than One Firm at a Time.
Can the worker work for more than one employer at a time?
If a worker performs more than de minimis services for a number of unrelated
persons or firms at the same time, the worker is generally considered an
independent contractors.
18. Making Service Available to General Public.
Does the worker offer services to the public?
The fact that a worker make his or her services available to the general public
on a regular and consistent basis indicates an independent contractor
relationship.
19. Right to Discharge.
Can the worker be fired?
The right to discharge a worker is a factor indicating that the worker is an
employee and the person possessing the right is the employer. An employer
exercises control through the threat of dismissal, which causes the worker to
obey the employer's instructions. An independent contractor, on the other hand,
cannot be fired so long as the independent contractor produces the result that
meets the contract specifications.
20. Right to Terminate.
Can the worker quit without incurring liability?
If the worker has the right to end his or her relationship with the person for
whom the services are performed at any time without incurring liability, an
employer-employee relationship exists.
These are the factors the IRS has used when determining whether a real estate
agent is an employee or common-law independent contractor.
