Contractor or employee?
Twenty factors the IRS considers
The Internal Revenue Service (IRS) considers 20 common law factors to determine whether an individual who performs work for a client company is an independent contractor or employee. The IRS uses the factors to establish the amount of control the company has over the means and methods of the individual’s performance. They include behavioral and financial control issues, as well as how the parties perceive their relationship.
Private duty providers that use caregivers who are independent contractors should closely evaluate their means of payment to those individuals, according to Elizabeth Hogue, a health care attorney in Burtonsville, MD. In IRS audits of some of her clients, a key issue the agency considered was whether the caregiver bore any risk for non-payment. For example, if a client of the private duty company did not pay for the services he received, was the caregiver paid anyway?
Shift the burden
One way to shift financial risk to independent contractor-caregivers is to require them to bill and receive payment directly from patients, Hogue advises.
Companies that have both independent contractors and employees doing similar types of work should be able to clearly articulate the different means of control it has over the two groups, advises Russell Hollrah, an attorney in the Washington, DC, office of Littler Mendelson. The differences should also be readily identifiable to employees and independent contractors.
The common law factors include:
1. Instructions. Instructing a worker on when, where, and how to perform work is evidence of control and indicative of employee status.
2. Training. The more training a worker receives through a client company, the more likely the worker may be seen as an employee.
3. Integration. As a worker’s services become more highly integrated or essential to the business operations of a client company, he is more likely to be considered an employee.
4. Services rendered personally. If a worker personally performs services, he may be considered an employee.
5. Hiring, supervising, and paying assistants. If a client company hires, supervises, and trains the worker’s assistants, or if a worker hires, supervises, and trains employees at the behest of a client company, the worker himself may be considered an employee.
6. Continuing relationship. Ongoing relationships between a worker and a client company may constitute an employment rather than contractor relationship. The regularity and duration of the relationship are also factors.
7. Set hours of work. If a worker must perform services during specified hours, he may be considered an employee.
8. Full-time work. A worker may be considered an employee if he must devote his full time to an engagement. The amount of work considered full-time varies with the nature of the occupation the worker is involved in and local custom.
9. Doing work on employer’s premises. If a worker uses an client company’s premises and office equipment to perform services, then he may be considered an employee, especially if the work could be performed equally well elsewhere.
10. Order or sequence set. If a worker must perform tasks in a specified way and follow proscribed routines and schedules, he may be considered an employee.
11. Oral or written reports. If a client company requires a worker to submit regular status reports, the worker may be considered an employee.
12. Payment by hour, week, or month. An employer-employee relationship may exist when a client pays a worker at regular intervals.
13. Payment for business and traveling expenses. Reimbursing a worker for his traveling or business expenses suggests an employee relationship.
14. Furnishing tools and materials. If a client company furnishes a worker with tools and materials needed to complete an engagement, then it may be considered the worker’s employer.
15. Significant investment. The less a worker has invested in the facilities or equipment that he uses to perform his services, the stronger the evidence that he is an employee.
16. Realization of profit or loss. A worker who earns income from a client company at a fixed rate, and without risk of loss, is more likely to be considered an employee.
17. Working for more than one firm at a time. If a worker performs services for only one client company at a time, he may be considered an employee.
18. Making services available to the general public. A worker who does not offer his services to the general public may show evidence that he is an employee.
19. Right to discharge. A worker who can be discharged at any time for any reason — as opposed to when he breaches the terms of a contract — may be considered an employee.
20. Right to terminate. A worker who can terminate an engagement at any time for any reason — rather than at the completion of the engagement or upon breach of a contract term by the client — may be considered an employee.
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