EMPLOYEES OR INDEPENDENT CONTRACTORS (cont.)

In order to determine the status of a worker and the payments made for services one must first understand the possible relationships creating the status. These, simply stated, are: 1. independent contractor, 2. common law employee, 3. statutory employee and 4. statutory non-employee. Most courts and the IRS apply this criteria.

Laws declaring an individual to be or not to be your employee determine the statutory versus non-statutory issue. One may not be an employee under common law but by statute they are considered such and vice versa. A full time licensed insurance agent working for one insurance company is generally a statutory employee. However, a licensed real estate broker contracting to sell your home would not by statute be your employee.

The IRS and the courts do not generally consider the statutory and statutory non-employee in the context of our discussion and it will not be discussed further. Our focus will be on the rules and criteria distinguishing “employees” and “independent contractors” from each other.

State government agencies sometimes apply the ABC test to determine employee versus independent contractor status. If you meet all of the following criteria you are an independent contractor, if not, you are an employee:

1. The worker controls and directs the performance of the service from a contractual standpoint and “in fact.” (The “in fact” concept is where the one generally fails the test.)
2. The service being performed is either outside the normal business of or outside the place of business of the business for which it is being performed.
3. The worker is performing services for others or clearly has an independent trade, occupation, profession or business.

This is also referred to as the “Economic Reality Test” and is included in the Twenty Factors Test of the IRS and the courts’ interpretation of employment status. This test is fairly limited to the agencies applying the test, and we will only further consider the more frequently applied tests of the courts and IRS.

The first factor considered by courts and the IRS is “do you control/direct only the result of the work done by the worker or do you control the means and methods of accomplishing the result.” For example: You, the general contractor on an apartment complex with 10 buildings, hire a roofer. He estimates 220 man-hours at $20 per hour. You agree to a mobilization fee of 10%, 8% of the total upon completion of each building and a 10% holdback until after inspection. You are controlling the result, not the means and method, and the roofer is an independent contractor.

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