Classifying an individual as either an employee or independent contractor isn’t a simple task. Unfortunately, no standard test has emerged to determine the true character of an independent contractor relationship under the Fair Labor Standards Act. Employers have various considerations to determine how issues of employment benefits, workers’ compensation, unemployment compensation, wage and hour laws, taxes or protection under Title VII of the Civil Rights Act, the American with Disabilities Act and the Family and Medical Leave Act affect their working relationship with their workforce.
What’s the difference? According to the IRS, the general rule requires an employer to have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result. On the other hand, the IRS classifies employees as an individual in which he employer can control how and when he/she performs tasks. Essentially, the facts that provide evidence of the degree of control and independence determine whether someone is an employee or independent contractor.
There are 4 common tests to determine an employment relationship. Employers should be aware that state and local variations of these tests also apply to any given situation. The recurring theme in all these tests is control, and in different ways, they all seek to determine the amount of control that an employer exerts over its workers.
- The Common Law Agency Test
This test requires consideration of 13 different factors, also known as the Reid factors, which individually may not determine the character of the relationship, but as a whole allow for an understanding of how much control an employer exerts over a particular individual.
- The Economic Realities Test
This test evaluates the level of financial dependence that the worker has on an employer. Generally, under the economic realities test, the more an individual depends on an employer, the more likely it is that the individual should be categorized as an employee.
- The Hybrid Test
As the name suggests, this test combines elements from the common law agency and the economic realities tests. The factors under this test consider special details in the relationship between an employer and a worker.
- The IRS 20-Point Test
Developed to determine the tax liability of employers and individuals, this test expands and classifies factors from the common law test into three categories: a sphere of behavioral control, a sphere of financial control, and the factors that determine the type of relationship that exists between parties.
Independent contractors and employees aren’t the same and it’s important for companies to understand the difference. Misclassifying these individuals has become an increasing issue of concern to governments, courts and regulatory agencies. Knowing this distinction will help a company avoid potential fines and costly legal consequences. To prevent any unwanted surprises, it’s essential that employers make a conscientious effort to define the true business relationship with their workers.