Legal Guidelines

Employers face significant risks as federal and state agencies scrutinize the true relationships between employers and independent contractors. Here are some of the federal and state tests used to assess compliance with worker classification standards. The application of these tests depends on the circumstances. Given the ever-changing landscape of compliance law, and broad interpretations of the tests and their application, engaging compliance subject matter experts effectively minimizes risk while safeguarding your resources.

Browse the links below to learn more about compliance regulations.

• IRS: 3 Factors / 20 Questions
  • Behavior Control Factors
  • Financial Control Factors
  • Relationships of the Parties Factors
• Relative Nature of the Work
• Common Law (aka "The Right to Control" test)
• Fair Labor Standards Act (FLSA) and Economic Realities
• ABC Test

IRS: 3 Factors/20 Questions

This 20-point checklist is used to determine if independent contractors qualify to be paid on a 1099. The questions distinguish who has the “right of control” between the parties by evaluating three factors: behavioral control, financial control and the relationship of the parties.

1. Behavioral Control Factors

   1. Instructions. A worker who is required to comply with other persons' instructions about when, where and how he or she is to work, is ordinarily an employee. This control factor is present if the person or persons for whom the services are performed have the RIGHT to require compliance with instructions.
   2. Training. Training a worker by requiring an experienced employee to work with the worker, by corresponding with the worker, by requiring the worker to attend meetings or by using other methods, indicates that the person or persons for whom the services are performed want the services performed in a particular method or manner.
   3. Integration. Integration of the worker's services into business operations generally shows that the worker is subject to direction and control. When the success or continuation of a business depends to an appreciable degree upon the performance of certain services, the workers who perform those services must necessarily be subject to a certain amount of control by the owner of the business.
   4. Services rendered personally. If the services must be rendered personally, presumably the person or persons for whom the services are performed are interested in the methods used to accomplish the work, as well as in the results.
   5. Hiring, supervising and paying assistants. If the person or persons for whom the services are performed hire, supervise and pay assistants, that factor generally shows control over the workers on the job. However, if one worker hires, supervises and pays the other assistants pursuant to a contract under which the worker agrees to provide materials and labor, and under which the worker is responsible only for the attainment of a result, this factor indicates an independent contractor status.
   6. Continuing relationship. A continuing relationship between the worker and the person or persons for whom the services are performed indicates that an employer-employee relationship exists. A continuing relationship may exist where work is performed at frequently recurring, although irregular, interval.
   7. Set hours of work. The establishment of set hours of work by the person or persons for whom the services are performed is a factor indicating control.
   8. Full time required. If the worker must devote substantially full time to the business of the person or persons for whom the services are performed, such person or persons have control over the amount of time the worker spends working and impliedly restrict the worker from doing other gainful work. An independent contractor, on the other hand, is free to work when and for whom he or she chooses.
   9. Doing work on employer's premises. If the work is performed on the premises of the person or persons for whom the services are performed, that factor suggests control over the worker, especially if the work could be done elsewhere.
   10. Order or sequence set. If a worker must perform services in the order or sequence set by the person or persons for whom the services are performed, that factor shows that the worker is not free to follow the worker's own pattern of work, but must follow the established routines and schedules of the person or persons for whom the services are performed. Often, because of the nature of an occupation, the person or persons for whom the services are performed do not set the order of the services or set the order infrequently. It is sufficient to show control, however, if such person or persons retain the right to do so.
   11. Oral or written reports. A requirement that the worker submit regular or written reports to the person or persons for whom the services are performed indicates a degree of control.
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2. Financial Control Factors

   12. Payment by the hour, week, or month. This generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment made by the job or on a straight commission generally indicates that the worker is an independent contractor.
   13. Reimbursement of expenses. If the person or persons for whom the services are performed ordinarily pay the worker's business and/or traveling expenses, the worker is ordinarily an employee. An employer, to control expenses, generally retains the right to regulate and direct the worker's business activities.
   14. Tools and equipment. The fact that the person or persons for whom the services are performed furnish significant tools, materials and other equipment tends to show the existence of an employer-employee relationship.
   15. Significant investment in business. If the worker invests in facilities that are used by the worker in performing services and are not typically maintained by employees (such as the maintenance of an office rented at fair value from an unrelated party), that factor tends to indicate that the worker is an independent contractor. On the other hand, lack of investment in facilities indicates dependence on the person or persons for whom the services are performed, for such facilities and, accordingly, the existence of an employer-employee relationship.
   16. Realization of profit or loss. A worker who can realize a profit or suffer a loss as a result of the worker's services (in addition to the profit or loss ordinarily realized by employees) is generally an independent contractor, but the worker who cannot is an employee.
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3. Relationship of the Parties Factors

   17. Working for more than one firm at a time. If a worker performs services for multiple unrelated persons or firms at the same time, it generally indicates that the worker is an independent contractor.
   18. Services available to the public. The fact that a worker makes his or her services available to the general public on a regular and consistent basis indicates an independent contractor relationship.
   19. Right to discharge. The right to discharge a worker is a factor indicating that the worker is an employee and the person possessing the right is an employer. An employer exercises control through the threat of dismissal, which causes the worker to obey the employer's instructions. An independent contractor, on the other hand, cannot be fired so long as the independent contractor produces a result that meets the contract specifications.
   20. Right to terminate. If the worker has the right to end his or her relationship with the person for whom the services are performed at any time he or she wishes without incurring liability, that factor indicates an employer-employee relationship.
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   Relative Nature of Work

   Most states use the common law test to classify workers, however many states now also require that independent contractors meet the criteria of the “relative nature of the work" test. This test is based on the premise that the cost of industrial accidents should be passed onto consumers as part of the cost of the associated product or service. If a worker’s services are a regulatory required part of that cost and the worker is not running an independent business, this test requires workers’ compensation insurance for the worker.
   
   To determine if a worker is an independent contractor or an employee according to the relative nature of the work test involves two key questions:
   1. Are the worker’s services a regular part of the cost of your service or product?
   2. Is the worker running an independent business?

   If the answer to both questions is yes, the worker is required to be classified as an employee for the purposes of workers’ compensation. The relative nature of the work test is often used in combination with the common law control test.

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   Common Law

   This test is based on the premise that employers have the right to direct and control how work is done both in terms of final results as well as details like when, where and how work is performed.
   1. The degree of "employer" control over the details of the work.
   2. Whether the individual's occupation is a distinct occupation or business.
   3. Whether the individual's occupation is usually done without supervision.
   4. Whether a high level of skill is required by the occupation.
   5. The length of time the services are provided.
   6. Method of payment, by the job rather than the hour or day.
   7. Whether or not the work is part of the regular business of the "employer".
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   Fair Labor Standards Act (FLSA) Economic Realities

   Enacted in 1938, the Fair Labor Standards Act (FLSA) applies to workers involved in interstate commerce. It sets standards with respect to working conditions, including such aspects as minimum wage and working hours. It has been periodically amended and adjusted to keep the standards relevant to the current working environment.
   
   The Economic Reality Test as well as the six criteria defined in the FLSA focus on whether an individual is economically dependent on the business to which services are provided. The specific criteria defined by the FLSA are as follows:
   1. The extent to which the services in question are part of the company's business.
   2. The amount of the individual's investment in the company's facilities and equipment.
   3. The nature and degree of control retained by management.
   4. The individual's opportunity for profit or loss.
   5. The amount of initiative, skill or judgment required.
   6. The permanency and duration of the relationship.
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   ABC Test

   This test requires an employer that contests an individual's entitlement to unemployment benefits based upon independent contractor status to establish:
   1. Such individual has been and will continue to be free from control and direction in connection with the performance of such services, both under his/her contract for the performance of service and in fact; and
   2. Such service is performed either outside the usual course of the business for which the service is performed or is performed outside of all the places of business of the enterprise for which the service is performed; and
   3. Such individual is customarily engaged in an independently established trade, occupation, profession or business or the same nature as that involved in the service performed.
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