Glossary
For definitions to frequently used terms, please refer to our alphabetical listing of compliance related terms.
ABC Test
This test requires an employer that contests an individual's entitlement to unemployment benefits based upon independent contractor status to establish:
- 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 contract for the performance of service and in fact; and
- 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
- 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.
ADA
Americans with Disabilities Act
ADEA
Age Discrimination in Employment Act
California Test for Employment
Main Test
Does the principal (you) have the right to direct and control the manner and means in which the worker carries out the job? The right of direction and control, whether or not exercised, is the most important factor in determining an employment relationship. The right to discharge a worker at will and without cause is strong evidence for the right of direction and control. When it is not clear whether you have the right to direct and control the worker, you must look further into the actual working relationship by weighing the ten secondary factors.
Secondary Factors
Depending on the type of relationship and the services performed, each factor varies in importance. Consider each factor independently, then consider them as a whole:
- Is the worker engaged in a distinct trade or occupation? Does the worker make his or her services available to the general public? Does the worker perform work for more than one firm/company at a time? Does the worker hire, supervise, or pay assistants? Does the worker have a substantial investment in equipment and facilities?
- Is the work done without supervision? In the geographic area and in the occupation, is the type of work usually done under the direction of a principal without supervision?
- Is the work highly skilled and specialized? Is the worker trained by the principal? Does the worker personally perform the services?
- Does the principal furnish/provide the tools, equipment, materials, supplies, and place of work? Does the worker perform the services on the principal's business premises?
- Are the services provided on a long-term or repetitive basis?
- Method of payment - Is the worker paid based on time worked or on completion of the project?
- Are the services an integral part of the principal's business?
- What type of relationship do the parties believe they are creating?
- What is the extent of actual control by the principal? Does the worker have the right to terminate the relationship without liability? Does the principal provide instructions on how to do the work? Does the principal establish the work hours or the number of hours to be worked? Does the principal require the work to be done in a particular order or sequence? Does the principal require oral or written reports from the worker?
- Is the work performed for the benefit of the principal's business?
Economic Realities Test
In applying the economic realities test, the most significant factor to be considered is whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker both as to the work done and the manner and means in which it is performed. Additional factors that may be considered depending on the issue involved are:
- Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
- Whether or not the work is a part of the regular business of the principal or alleged employer;
- Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
- The alleged employee's investment in the equipment or materials required by his or her task or his or her employment of helpers;
- Whether the service rendered requires a special skill;
- The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
- The alleged employee's opportunity for profit or loss depending on his or her managerial skill;
- The length of time for which the services are to be performed;
- The degree of permanence of the working relationship;
- The method of payment, whether by time or by the job; and
- Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.
COBRA
Consolidated Omnibus Budget Reconciliation Act
Common Law Employee (IRS)
Employee status under common law. Generally, a worker who performs services for you is your employee if you have the right to control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.
Generally, people in business for themselves are not employees. For example, doctors, lawyers, veterinarians, construction contractors and others in an independent trade in which they offer their services to the public are usually not employees. However, if the business is incorporated, corporate officers who work in the business are employees.
If an employer-employee relationship exists, it does not matter what it is called. The employee may be called an agent or independent contractor. It also does not matter how payments are measured or paid, what they are called or if the employee works full or part time.
EEOC
Equal Employment Opportunity Commission
ERISA
Employee Retirement Income Security Act
Federal Test for Employment
IRS 20 Factors
To determine if a worker is an independent contractor or an employee, consider behavioral control, financial control and relationship of the parties. An employer must generally withhold federal income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. An employer does not generally have to withhold or pay any taxes on payments to independent contractors.
Common Law Rules
To determine whether an individual is an employee or an independent contractor under the common law, the relationship of the worker and the business must be examined. In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered. Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control and the type of relationship of the parties. These facts are discussed below.
Behavioral Control
Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of:
Instructions that the business gives to the worker. An employee is generally subject to the business' instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work:
- When and where to do the work.
- What tools or equipment to use.
- What workers to hire or to 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.
The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker's performance or instead has given up that right.
Training that the business gives to the worker. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.
Financial Control
Facts that show whether the business has a right to control the business aspects of the worker's job include:
The extent to which the worker has not reimbursed business expenses. Independent contractors are more likely to have not reimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur not reimbursed expenses in connection with the services that they perform for their business.
The extent of the worker's investment. An independent contractor often has a significant investment in the facilities he or she uses in performing services for someone else. However, a significant investment is not necessary for independent contractor status.
The extent to which the worker makes his or her services available to the relevant market. An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.
How the business pays the worker. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.
The extent to which the worker can realize a profit or loss. An independent contractor can make a profit or loss.
Type of Relationship
Facts that show the parties' type of relationship include:
Written contracts describing the relationship the parties intended to create.
Whether or not the business provides the worker with employee-type benefits. These include insurance, a pension plan, vacation pay or sick pay.
The permanency of the relationship. If you engage a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship.
The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of your regular business activity, it is more likely that you will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney's work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.
FLSA
Fair Labor Standards Act
FMLA
Family Medical Leave Act
Hybrid Test
Any combination of the Common Law and Economic Realities tests
Independent Contractors (IRS)
People such as lawyers, contractors, subcontractors, and auctioneers who follow an independent trade, business, or profession, in which they offer their services to the public, are generally not employees. However, whether such people are employees or independent contractors depends on the facts in each case. The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.
Leased Employees
Under certain circumstances, a corporation furnishing workers to various professional people and firms is the employer of those workers for employment tax purposes. For example, a professional service corporation may provide the services of secretaries, nurses and other similarly trained workers to its subscribers.
The service corporation enters into contracts with the subscribers under which the subscribers specify the services to be provided and a fee is paid to the service corporation for each individual furnished. The service corporation has the right to control and direct the worker's services for the subscriber, including the right to discharge or reassign the worker. The service corporation hires the workers, controls the payment of their wages, provides them with unemployment insurance and other benefits, and is the employer for employment tax purposes.
NLRB
National Labor Relations Board
PEO
Professional Employer Services, also known as employer of record services.
Safe Harbor (Section 530)
Section 530 provides certain safe-harbor rules. If safe harbor applies, the IRS could not re-classify the worker as an employee in general if, the:
- company treated individuals consistently as contractors
- company was in full compliance by filing all required forms such as Form 1099 and so forth.
- company could rely on reasonable basis for their practice of classifying the worker as a contractor, for example, judicial precedent, past IRS audit or industry practice.
Statutory Employee (IRS)
If someone who works for you is not an employee under the common law rules, do not withhold federal income tax from his or her pay. Although the following persons may not be common law employees, they may be considered employees by statute for social security, Medicare and FUTA tax purposes under certain conditions:
- An agent (or commission) driver who delivers food, beverages (other than milk), laundry or dry cleaning for someone else.
- A full-time life insurance salesperson who sells primarily for one company.
- A home worker who works by guidelines of the person for whom the work is done, with materials furnished by and returned to that person or to someone that person designates.
- A traveling or city salesperson (other than an agent-driver or commission-driver) who works full time (except for sideline sales activities) for one firm or person getting orders from customers. The orders must be for items for resale or use as supplies in the customer's business. The customers must be retailers, wholesalers, contractors or operators of hotels, restaurants or other businesses dealing with food or lodging.
Statutory Non-Employee (IRS)
Direct sellers, qualified real estate agents and certain companion sitters are, by law, considered non-employees. They are generally treated as self-employed for all federal tax purposes, including income and employment taxes.
TITLE VII
Civil Rights Act
WARN
Worker Adjustment and Retraining Act