Here are some questions you need to answer in order to determine whether the worker is an employee or an independent contractor.
1. Does the business control or have the right to control what the worker does and how the work is to be performed?
Generally speaking, the more control management exerts over the worker’s activities, the more likely it is that he/she is an employee. An employee is generally subject to the employer’s instructions about when and where to work, and how the work is to be done. The more detailed the instructions, the more control the business exercises over the worker (such as what tools and equipment to use, what work must be performed during a shift, what order or sequence to perform tasks, where to order supplies, etc). More detailed instructions indicate that the worker is an employee. Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.
2. Does the business train the worker?
If the business provides the worker with training on how to do the job, this demonstrates that the business wants the job done in a particular way, and again indicates a degree of control. This is strong evidence that the worker is an employee. Periodic or on-going training about procedures and methods is even stronger evidence of an employer-employee relationship. Independent contractors ordinarily use their own methods.
3. Do you require the worker to perform the work personally?
If you insist that the worker perform the work personally, this implies a measure of control over how the work is performed; thus, the worker is an employee. A true independent contractor could assign the work to someone else.
4. Do you hire assistants for the worker?
Hiring assistants for your worker implies control over such assistants and an employment status. An independent contractor would be more likely to hire their own assistants.
5. Do you have an ongoing relationship with the worker?
Even if the work is performed at irregular intervals, the fact that you use the worker’s services over a long period of time would tend to indicate employment status. If you hire 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 the intent of both parties was to create an employer-employee relationship.
6. Do you require that the worker work exclusively for your business?
A worker who is engaged only by your company is probably an employee. By contrast, a worker who performs work for many clients is more likely an independent contractor.
If the worker is required to devote his/her full time to your business, this indicates a high degree of control. This situation keeps the worker from doing other gainful work. 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 for other companies in the relevant market.
7. How is the worker paid?
An employee is generally guaranteed a regular wage – hourly, weekly, monthly, or otherwise. 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 a flat fee for the job. This fee may be paid in regular installments over the life of the project, a typical arrangement in an independent contractor relationship. However, it is common in some professions, such as law, to pay independent contractors hourly.
8. Do you pay the worker’s business or travel expenses?
Reimbursement of business or travel expenses implies a degree of control, and indicates employee status. Independent contractors are more likely to pay their own expenses than employees are. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur un-reimbursed expenses in connection with the services that they perform for their business.
9. Has the worker made a significant investment in tools, equipment or facilities?
If the worker uses your tools, equipment and facilities, this implies an employer-employee relationship. An independent contractor often has a significant investment in equipment, tools and materials he/she uses in working for someone else. And if the worker has his/her own facility (such as an office) from which he/she performs the work, that is a strong indicator that he/she is an independent contractor.
However, in many occupations, such as construction, workers have significant investment in the tools and equipment they use and are still considered to be employees. And a significant investment is not a required factor for independent contractor status, as some types of work do not require large expenditures.
10. Does the worker incur a risk of loss from the results of the services rendered?
The opportunity for profit or risk of loss is an important factor in determining independent contractor status. If a worker does not incur the risk of loss normally associated with running a business, this implies that he/she is an employee. If a worker has a significant investment in the tools and equipment used and if the worker has unreimbursed expenses, the worker is at greater risk to lose money, which would indicate that the worker is an independent contractor.
11. Do you have a written contract with the worker?
Although a contract may state that the worker is an employee or an independent contractor, this is not sufficient in and of itself to determine the worker’s status. Rather, it is how the parties work together that determines whether the worker is an employee or an independent contractor.
12. Do you have the right to fire the worker?
An employee can be fired. An independent contractor cannot be terminated as long as he/she is meeting his/her performance obligations under the contract he/she has with your business.
13. Can the worker quit at any time without liability?
If the worker has the right to give notice and quit working for you without assuming any liability for doing so, this indicates that he/she is an employee. By contrast, an independent contractor would incur liability and risk a possible lawsuit for breach of contract, unless the reasons for termination are in accordance with the terms of the contract.
14. Is the worker’s performance evaluated?
If the worker’s performance is evaluated by management, then this would point to employee status. If the evaluation system measures just the end result of the work, then this can point to either an independent contractor or an employee.
15. Are employee benefits available to the worker?
Employee benefits include pension plans, paid vacation, sick days, disability insurance, stock options, medical and dental insurance. Businesses generally do not grant these benefits to independent contractors. However, the non-availability of employee benefits does not automatically mean that the worker is an independent contractor.
16. Are the worker’s services considered a key aspect of the business?
If a worker provides services that are a key aspect of the business, it is more likely that the business will have the right to direct and control his or her activities, which would indicate an employer-employee relationship. If the worker performs services that anyone could perform, independent contractor status is more likely.
There is no magic formula for establishing an employment relationship. All factors must be considered and taken together. Remember, too, that factors which may be relevant in one situation may not apply in another. Review the entire relationship, consider the degree or extent of the company’s right to direct and control the worker, and document each of the factors used in making your determination.