The determination of whether an individual is an employee or an independent contractor usually depends on a simple concept: Who’s the Boss? If the company functions as the boss, the individual is usually an employee. If the individual is his or her own boss, then he or she is likely to be an independent contractor.
Although the concept may be simple, the determination is often complex.The predominant standard for making the determination is provided under the Internal Revenue Code (IRC) which sets forth three basic categories of consideration elaborated upon in IRS publication “Independent Contractor (Self-Employed) or Employee?”
These three categories are:
Behavioral Control — This type of control centers on how much direction, instruction and/or training the company provides to the individual. More control by the company suggests that the person is an employee and not an independent contractor. For example, the individual is more likely to be an employee if the company determines:
• When and where to do the work.
• What tools or equipment to do the work
• What workers to hire or assist with the work
• Where to purchase supplies and services
• What work must be performed by a specified individual
• What order or sequence to follow when performing the work
The individual is also likely to be considered an employee if the company provides him or her with training and/or evaluates the employee’s performance according to a rating system used for company employees
Financial control. It is likely that the individual is an employee when the company has the right to control the business/financial aspects of the individual’s job. Therefore, the individual will more likely be an independent contractor the more factors there are which indicate that he or she is running a separate business, such as:
• The individual has a significant financial interest in the facilities he or she uses for performing the work for someone else.
• The company does not reimburse the individual for expenses for tools and equipment because a separate business pays its own expenses.
• The individual can make a profit (or incur a loss) for performing the work.
• The individual makes his or her services available to others besides this company.
• Payment for services rendered is usually a flat fee, not an hourly rate or salary.
Relationship of the parties. How both parties perceive their relationship is the third important factor. The individual will generally be an independent contractor when a written contract exists describing the relationship the parties intend to create.
The individual is more likely to be an employee when:
• There is no written contract establishing the relationship between the parties.
• The individual receives company benefits like health insurance or 401 (k).
• The company hires the individual with an expectation that the working relationship will continue indefinitely.
• The services performed by the individual are performed by other employees of the company and are a regular part of the business of the company.
So, if you mean to retain an independent contractor and not an employee, what are some things you should do to make sure there’s no question the individual is a contractor?
So, Who’s the Boss?
The Boss of determining the proper work status for each and every person in your workplace.