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Employee v. Independent Contractors


There are many advantages to companies treating workers as independent contractors: the employer need not withhold income, payroll or their portion of FICA taxes; they need not provide health insurance or other employee benefits; and, perhaps the most importantly, companies generally are not liable for the acts or omissions of independent contractors.

Because of these benefits, the IRS closely scrutinizes a company's ability to classify workers as independent contractors. When a company elects to treat a worker as an independent contractor, it must adhere to the governing employment statute and the IRS requirements or the worker will be deemed an employee.

The definition of employee differs under the various employment statutes. Under the National Labor Relations Act ("NLRA"), the National Labor Relations Board ("NLRB"), uses the "the right to control" criteria as a key principle in determining whether an individual is an employee or an independent contractor.

The "right of control" test is often summarized in this fashion: If the entity for whom the services are performed retains the right to control the manner and means in which the results are to be accomplished, the person who performs the services is an employee; if only the results are controlled, the person who performs the services is an independent contractor.

Under the Fair Labor Standards Act, the criteria which is considered by most courts in determining whether an individual is an employee or an independent contractor, the determination is mad under an "economics realities test." Does the individual have other readily available opportunities to earn a living if he or she were to stop working rot that company?

The Act also considers factors such as:

  • the nature and degree of the alleged employer's control as to the manner in which the work is to be performed
  • the worker's opportunity for profit or loss depending upon his/her managerial skills; and
  • the worker's investment in equipment or materials required for his/her task
  • The Illinois Workman's Compensation Act, however, considers factors such as:
  • the right to control the manner in which work is done
  • the method of payment
  • the right to discharge
  • the skill required and the work to be done

The IRS determines whether an individual is an independent contractor or an employee using the "20 Factor Test." These factors are used by the IRS to determine whether a company has enough "control" over a worker to be an employer. Answering "yes" to a majority of the first 16 factors and "yes" to factors 17-20 indicates independent contractor status.

Among the first 16 IRS factors are:

  • instructions by company;
  • training;
  • integration of work to overall business;
  • services rendered personally;
  • hiring, paying and supervising of assistants; and
  • continuing relationship;

Factors 17-20 include:

  • right to terminate;
  • investment in facilities or equipment;
  • opportunity for profit or loss;
  • work for more than one company; and
  • services available to general public.

The importance of each factor depends on the facts and circumstances of a particular employment relationship on the industry and type of services being provided. In light of the IRS crackdown and the varying guidelines, it is vital that companies considering classifying or reclassifying workers as independent contractors first seek legal advice.

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