What is the common law “20-factor test” for determining employee status?

Generally, an employer-employee relationship exists under common law rules when the employer has the right to control and direct the individual who performs services, not only as to the result to be accomplished by the work, but also as to the details and means by which that result is to be accomplished.

Because the control element has confused many employers, the IRS, together with the Social Security Administration, has developed a 20-factor test to assess the degree of control held by the person contracting for those services.

The 20 factors are guidelines and the relative importance of each factor varies with the occupation at issue and the facts of the situation. An employer that wants a definitive answer regarding the proper classification of a worker should file Form SS-8 (Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding) with the IRS.

The 20 factors. The 20 factors the IRS will look at are:

1. Instructions. A person who must comply with instructions about when, where, and how to work is ordinarily an employee. The control factor is present if the employer has the right to instruct.

2. Training. Training by an experienced employee, by correspondence, by required attendance at meetings, and by other methods is a factor of control because it is an indication that the employer wants the services performed in a particular manner.

3. Integration. Integration of the person's services in the business operation generally shows that the person is subject to direction and control.

4. Services rendered personally. If services must be rendered personally, this is an indication that the employer is interested in methods as well as results.

5. Hiring, supervising, and paying assistants. Hiring, supervising, and payment of assistants by the employer generally shows control over all of the workers on the job. However, where one worker hires, supervises and pays other workers, under a contract providing that he or she furnish labor/materials and that he or she will be responsible only for the attainment of a result, the worker is an independent contractor.

6. Continuing relationship. The existence of a continuing relationship between the worker and person for whom services are performed indicates that the worker is an employee.

7. Set hours. Establishment of set hours of work by the employer indicates control.

8. Full-time availability. If the worker must be available full-time to the employer, the worker is implicitly restricted from doing gainful work for someone else and this indicates that the worker is an employee. An independent contractor may choose for whom and when to work.

9. Work on employer's premises. Doing work on the employer's premises implies that the customer has control.

10. Set sequence of work. If the person must perform services in an order set by the employer, it shows that the worker may be subject to control.

11. Reports. If the worker must submit regular reports to the employer, this shows control.

12. Frequency of payment. Employees are usually paid by the hour, week, or month; payment on a commission or job basis is customary when the worker is an independent contractor. A guarantee of a minimum salary or the granting of a drawing account at stated intervals with no requirement of repayment of excess over earnings tends to indicate an employer-employee relationship.

13. Business expenses. Payment by the employer of the worker's business or travelling expenses indicates control.

14. Employer-furnished tools. Furnishing of tools and materials by the employer indicates control.

15. Significant investment. A significant investment by a worker in facilities used for performing services tends to show independent contractor status, while the furnishing of all necessary facilities by the employer tends to indicate employee status for the worker.

16. Realization of profit/loss. Individuals who may realize a profit or suffer a loss as a result of their services are generally independent contractors.

17. Work for more than one firm. If a person works for a number of employers at the same time, this indicates independent contractor status.

18. Services available to public. Workers who make their services available to the general public are usually independent contractors.

19. Right to discharge. The right to discharge indicates an employer-employee relationship.

20. Right to terminate. Employees have the right to end the relationship with the employer at any time without incurring legal liability, while independent contractors usually are legally obligated to make good for failure to complete the job.