This question has been asked again and again by organizations, government agencies and the independent contractors themselves. In answering this question, one must understand what is truly at stake, and the rules to follow in classifying an independent contractor.
From an organization’s perspective, independent contractors do not require organizations to:
- Withhold state and federal payroll taxes
- Withhold unemployment compensation taxes
- Provide health and welfare benefits when applicable
- Provide contributions to a company sponsored retirement plan
- Extend eligibility for incentive compensation programs such as bonus and equity
- Provide additional benefits such as paid time off (including Connecticut Paid Sick Leave), bereavement pay, jury duty, and tuition reimbursement
- Allow the right to unionize
- Be required to provide mandatory pay/leave such as Family and Medical Leave (FMLA), worker’s compensation, as well as certain state required leave such as Connecticut’s Family & Violence Leave.
Obviously, for the misclassified independent contractor, they are not eligible for the preceding deductions, contributions, access to various employee only benefits and eligibility for government mandated programs and rights – not so much for true independent contractors.
For government agencies such as both the federal and state Departments of Labor and the Internal Revenue Service, they are motivated by both requiring organizations to follow the regulations governing independent contractor classifications, and also ensuring that workers are treated fairly – not to mention securing taxes, and penalties and fines when organizations are not compliant.
What are the rules or “tests” that when used determine the classification of an independent contractor? When including both federal and various state tests – there are many. Focusing on two primary tests: the IRS 20 Factor Test, and the CT DOL ABC Test:
IRS 20 Factor TestPrimary question: who has control over the work being done?
- Instructions: Workers who are required to comply with others’ instructions about when, where, and how they are to work are ordinarily employees.
- Training: Training workers indicates that employers exercise control over the means by which results are accomplished.
- Integration: When the success or continuation of a business depends on the performance of certain services, the workers performing those services are subject to a certain amount of control by the owners of the businesses.
- Services rendered personally: If services must be rendered personally, employers control both the means and the results of the work.
- Hiring, supervising and paying assistants: Control is exercised if employers hire, supervise, and pay assistants.
- Continuing relationships: Continuing relationships between workers and employers indicate that employer-employee relationships exist.
- Set hours of work: The establishment of set hours of work by employers indicates control.
- Full-time required: If workers must devote full-time to employers’ businesses, employers have control over workers’ time. Independent contractors are free to work when and for whom they choose.
- Doing work on employers’ premises: Control is indicated if the work is performed on employers’ premises.
- Order or sequences set: Control is indicated if workers are not free to choose their own patterns of work but must perform services in the sequences set by the employers.
- Oral or written reports: Control is indicated if workers must submit regular oral or written reports to employers.
- Payment by hour, week or month: This points to employer-employee relationships, provided that this method of payment is not just a convenient way of paying a lump sum agreed on as the cost of a job. Independent contractors are usually paid by the job or on straight commission.
- Payment of business and/or traveling expense: Employers paying workers’ expenses of this nature shows that employer-employee relationships usually exist.
- Furnishing tools and materials: If employers furnish significant tools, materials, and other equipment, employer-employee relationships usually exist.
- Significant investments: Workers are independent contractors if they invest in facilities that are not typically maintained by employees (such as an office rented at fair market value from an unrelated party). Employees depend on employers for such facilities.
- Realization of profits or losses: Workers who can realize profits or losses (in addition to profits or losses ordinarily realized by employees) they are independent contractors. Workers who cannot are generally employees.
- Working for more than one firm at a time: If workers perform services for a number of unrelated persons at the same time, they are usually independent contractors.
- Making services available to the general public: Workers are usually independent contractors if they make their services available to the general public on a regular and consistent basis.
- Right to discharge: The right of employers to discharge workers indicates that the workers are employees.
- Right to terminate: Workers are employees if they have the right to end their relationships with their principals at any time without incurring liability.
The Connecticut DOL ABC Test
- The individual must be free from direction and control (work independently) in connection with the performance of the service, both under his or her contract of hire and in fact
- The individual’s service must be performed either outside the usual course of business of the employer or outside all the employer’s places of business
- The individual must be customarily engaged in an independently established trade, occupation, profession or business of the same nature as the service performed.
What is certain by reviewing both of these tests – neither are easy to apply, and the results are often not conclusive. For instance, is a worker under the direction of the employer – in some cases, the answer can be both yes and no. This question can also be easier to answer in some industries or professions as opposed to others.
Take the case of an IT professional who provides their own equipment, maintains other clients and schedules themselves fairly flexibly through a typical work month. This appears fairly certain that the classification can be an independent contractor. Conversely, take the case of Automobile Appraisers hired as independent contractors by one company. These Appraisers currently had no other clients but used their own equipment and supplies. They were misclassified according to the CT DOL, but an Appeals Court later overturned that decision.
What is an organization to do? Regardless of which test one uses, approach this conservatively, and ensure that the independent contractor truly does maintain control of their work, especially if what they are providing is a core competency of the organization’s product or service.