We often hear that a firm has no employees; that the earnings for all workers are reported using form 1099 rather than form W-2 and, therefore, they are independent contractors. But, does that make the worker an independent contractor?
Factors that determine the status of being an employee versus that of an independent contractor for purposes of workers compensation insurance in Michigan use the IRS list of 20 Factors outlined in Revenue Ruling 87-41. This IRS Ruling includes the list of 20 Factors plus 3 Categories of Control and it is the picture created when weighing the factors and categories together that are used to assess the likelihood as to whether an individual is an employee or an independent contractor. It cannot be determined based on any one factor alone and, on the other hand, not all factors need to be present to find an employee/employer relationship.
1. Instructions. An employee must comply with instructions about when, where and how to work. The control factor is present if the employer has the right to require compliance with the instructions.
2. Training. An employee receives on-going training from, or at the direction of, the employer. Independent contractors use their own methods and receive no training from the purchasers of their services.
3. Integration. An employee’s services are integrated into the business operations because the services are important to the business. This shows that the worker is subject to the direction and control of the employer.
4. Services rendered personally. If the services must be rendered personally, presumably the employer is interested in the methods used to accomplish the work as well as the end results. An employee often does not have the ability to assign their work to other employees, an independent contractor may assign the work to others.
5. Hiring, supervising and paying assistants. If an employer hires, supervises and pays assistants, the worker is generally categorized as an employee. An independent contractor hires, supervises and pays assistants under a contract that requires him or her to provide materials and labor and to be responsible for the result.
6. Continuing relationship. A continuing relationship between the worker and the employer indicates that an employer-employee relationship exists. A continuing relationship may exist where work is performed at frequently recurring intervals, even if the intervals are irregular.
7. Set hours of work. A worker who has set hours of work established by an employer is generally an employee. An independent contractor sets his/her own schedule.
8. Full time required. An employee normally works full time for an employer. An independent contractor is free to work when and for whom he/she chooses.
9. Work done on premises. Work performed on the premises of the employer for whom the services are performed suggests employer control, and therefore, the worker may be an employee. Independent contractor may perform the work wherever they desire as long as the contract requirements are performed.
10. Order or sequence set. A worker who must perform services in the order or sequence set by an employer is generally an employee. An independent contractor performs the work in whatever order or sequence they may desire.
11. Oral or written reports. A requirement that the worker submit regular or written reports to the employer indicated a degree of control by the employer.
12. Payments by hour, week or month. Payments by the hour, week or month generally point to an employer-employee relationship.
13. Payment of expenses. If the employer ordinarily pays the worker’s business and/or travel expenses, the worker is ordinarily an employee.
14. Furnishing of tools and equipment. If the employer furnishes significant tools, materials and other equipment, the worker is generally an employee.
15. Significant investment. If a worker has a significant investment in the facilities where the worker performs services, the worker may be an independent contractor.
16. Profit or loss. If the worker can make a profit or suffer a loss, the worker may be an independent contractor. Employees are typically paid for their time and labor and have no liability for business expenses.
17. Working for more than one firm at a time. If a worker performs services for a multiple of unrelated firms at the same time, the worker may be an independent contractor.
18. Making services available to the general public. If a worker makes his/her services available to the general public on a regular and consistent basis, the worker may be an independent contractor.
19. Right to discharge. The employer’s right to discharge a worker is a factor indicating that the worker is an employee.
20. Right to terminate. If the worker can quit work at any time without incurring liability, the worker is generally an employee.
THREE CATEGORIES of CONTROL FACTORS. The following categories are used in conjunction with the 20 Factors listed above to assess the degree of control and independence:
1. Behavioral control. Includes the type of instructions the business gives to the worker, such as when and where to do the work, and the training the business provides to the worker. The key consideration is whether the business has retained the right to control the details of the worker’s performance or has relinquished that right.
2. Financial control. Addresses the business’s right to control the business aspects of a worker’s job.
3. Relationship of parties. The nature of the relationship may be evidenced by:
a. A written contract;
b. The benefits the business provides to an employee such as paid vacation and health coverage;
c. The permanency of the position; and
d. The extent to which the services performed are a key aspect of the regular business of the company.
Notice that none of the factors have anything to do with earnings being reported using form 1099 versus W-2!
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Sources: Michigan Worker's Compensation Agency, Internal Revenue Service