Independent Contractor or Employee? Turns out it depends who you ask

There are at least four agencies that are concerned with the employee vs contractor question: IRS, Your State Taxing Authority, State Unemployment Agency and the Department of Labor. Each one of them has a different set of guidelines that they use to determine how to classify those that help you operate your business. 

​Below you will find a break-down of the criteria used by government agencies to make the determination. However each determination is made based on the details of the individual case. Give us a call, we will gather the information and give you insights from our experience.

 

 

 

 

 

 

 

 

According to the IRS, the three most important factors are:

  1. Instructions to workers: Your worker is probably an employee if you require him or her to follow instructions on when, where, and how work is to be done.  However, if you tell your electrician you want blue switch plate covers instead of white, you are not exercising control to a degree that would make the person an employee.

 

  1. Job training: If your company provides or arranges for training of any kind for the worker, this is a sign you expect work to be performed in a certain way; therefore, the worker is your employee.  Training can be as informal as requiring the worker to attend meetings or work along with someone who’s more experienced.

 

  1. Worker’s ability to make a profit or suffer a loss:  An employee may be rewarded, disciplined, demoted, or fired depending on job performance, but only an independent contractor can realize a profit or incur a financial loss from his or her work.  In other words, an employee will always get paid; an independent contractor, however, has a financial stake in his enterprise.

 

The more control a company exercises over how, when, where, and by whom work is performed, the more likely the workers are employees, not independent contractors.

Local Taxing Authority (State Unemployment):

As a business owner if you hire someone to perform work for payment then the state of Utah will use the following criteria to determine independent contractor status:

 

  1. The individual is customarily engaged in an independently established trade, occupation, profession, or business 

  2. The individual has been and will continue to be free from control or direction over the means of performance of those services.

Then in further detail they will use the following factors to determine if they are engaged in an independent trade, occupation, profession or business:

 

  1. Separate Place of Business. 

  2. Tools and Equipment. The individual worker has a substantial investment in the tools and equipment to perform the services. 

  3. They have other Clients. 

  4. The worker takes on the risk of a profit or loss from the work. 

  5. They advertise for services. 

  6. The individual has obtained any required and customary business, trade or professional licenses.

  7. The worker files self-employment and other business tax forms required by the Internal Revenue Service and other tax agencies. 

 

As the employer if you control the when, where, what and how then they may be an employee. Below is a detailed list the state agency will use to determine employment status:

 

  1. Instructions. A worker who is required to comply with another person’s instructions about when, where and how he is to work is ordinarily an employee. This factor is present if the employer for whom the service is performed has the right to require compliance with instructions.

  2. Training. Training a worker by requiring an experienced person to work with the individual, by corresponding with the individual, by requiring the individual to attend meetings, or by using other methods, indicates that the employer for whom the services are performed expects the services to be performed in a particular method or manner.

  3. Pace or Sequence. A specific requirement that the service must be provided at a pace or ordered sequence of duties imposed by the employer indicates control and direction. However, mere coordinating and scheduling of the services of more than one worker does not indicate control and direction.

  4. Work on Employer’s Premises. A requirement that the service be performed on the employer’s premises indicates that the employer for whom the service is performed has retained a right to supervise and oversee the manner in which the service is performed, especially if the service could be performed elsewhere.

  5. Personal Service. A requirement that the service must be performed personally and may not be assigned to others indicates the right to control or direct the manner in which the work is performed.

  6. Continuing Relationship. A continuous service relationship between the worker and the employer indicates that an employer-employee relationship exists. A continuous relationship may exist where work is performed regularly or at frequently recurring although irregular intervals. A continuous relationship does not exist where the worker is contracted to complete specifically identified projects, even though the service relationship may extend over a significant period of time.

  7. Set Hours of Work. The establishment of set hours or a specific number of hours of work by the employer indicates control.

  8. Method of Payment. Payment by the hour, week or month points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying progress billings as a part of a fixed price agreed upon as the cost of a job. Control may also exist when the employer determines the method of payment.

The Department of Labor

There is no single test for determining if a person is a independent contractor or an employee. The US Supreme court has used the follow factors to determine who may be treated as an contractor for DOL standards:

  1. The extent to which the services rendered are an integral part of the principal's business.

  2. The permanency of the relationship.

  3. The amount of the alleged contractor's investment in facilities and equipment.

  4. The nature and degree of control by the principal.

  5. The alleged contractor's opportunities for profit and loss.

  6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.

  7. The degree of independent business organization and operation.

Additional Sources of Information:

Department of Labor

Utah Department of Workforce Services

 
 
 
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