Unfortunately for employers, there is no universal definition of an “independent contractor,” and different laws and government agencies (e.g., Internal Revenue Service, U.S. Department of Labor) utilize different fact-specific tests when determining whether an individual is an independent contractor or an employee.
The IRS test, for example, focuses on “control” to determine if the worker is an employee or independent contractor. More specifically, the IRS examines behavioral control (i.e., does the company control or have the right to control what the worker does and how the worker does his or her job?), financial control (e.g., how the worker is paid, whether expenses are reimbursed, who provides tools/supplies), and the type of relationship between the parties (e.g., whether there is a written independent contractor agreement, whether the worker receives benefits, whether the work performed by the worker is a key aspect of the business).
The U.S. DOL, on the other hand, focuses on the “economic realities” of the relationship, including:
- The extent to which the worker’s services are an integral part of the employer’s business (e.g.,Does the worker play an integral role in the business by performing the primary type of work that the employer performs for his customers or clients? Does the worker perform a discrete job that is one part of the overall process of production? Does the worker supervise any of the company’s employees?)
- The permanency of the relationship (e.g., How long has the worker worked for the same employer?)
- The amount of the worker’s investment in facilities and equipment (e.g., Is the worker reimbursed for any purchases or materials, supplies, etc.? Does the worker use his or her own tools or equipment?)
- The nature and degree of control by the principal (e.g., Who decides the working hours? Who is responsible for quality control? Does the worker work for any other employers? Who sets the pay rate?)
- The worker’s opportunities for profit and loss (e.g., Did the worker make any investments such as insurance or bonding? Can the worker earn a profit by performing the job more efficiently or exercising managerial skill or suffer a loss of capital investment?)
- The level of skill required in performing the job and the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise (e.g.,: Does the worker perform routine tasks requiring little training? Does the worker advertise independently via yellow pages/the Internet, business cards, etc.? Does the worker have a separate business site?).
Employers should work with legal counsel to review their independent contractor classifications and independent contractor agreements for legal compliance.