20-factor control test for determining if worker is an employee or
independent contractor
To help determine whether a worker is an employee or an independent contractor for wage
withholding purposes, IRS developed a twenty-factor control test based on common law
principles. The twenty factors indicate what degree of control by the business over the worker
is sufficient to establish an employer-employee relationship.
The degree of importance of each factor varies depending on the occupation and the factual
context in which the services are performed. The twenty factors are guides for determining
whether an individual is an employee. Special scrutiny is required in applying the twenty
factors to assure that form is not elevated over substance.
The twenty factors are:
.. Instructions to worker
... Training,
... Integration into business operations
... Requiring services to be rendered personally,
... Hiring, supervising, and paying assistants,
... Continuity of the relationship,
... Setting the hours of work,
... Requirement of full-time work,
... Working on the employer's premises
... Setting the order or sequence of work,
... Requiring oral or written reports,
... Paying the worker by the hour, week, or month,
... Paying the worker's business and/or traveling expenses,
... Furnishing worker's tools and materials,
... Significant investment by worker,
... Realization of profit or loss by worker,
... Working for more than one business at a time,
... Availability of worker's services to the general public,
... Firms' right to discharge worker, and
…Worker’s right to terminate relationship,
The 20-factor test isn't fixed in stone. IRS recognizes that the information important in helping
to determine the tax status of a worker changes over time because business relationships
change over time. As a result, some of the 20 factors are no longer as relevant as they once
were.
A bankruptcy court said that IRS's 20-factor test was not all-inclusive, and considered the
following additional four factors to determine that loggers working for a contractor were
independent contractors rather than employees:
(1) The industry practice or custom in the area of the parties;
(2) The intent of the parties;
(3) Whether written, signed independent contractor agreements were executed;
and
(4) Whether employee-type benefits were provided. These benefits include paid
vacation, sick leave, medical insurance, and pension accrual. The fact that
workers' compensation is provided does not indicate an employer-employee
relationship where no other employee-type benefits are provided.
With regard to employee-type benefits, IRS has stated that the fact that a
worker is excluded from a benefits plan because he is not considered an
employee by the employer is a relevant factor, although not conclusive, in
determining the status of a worker as an employee or independent
contractor.
Common-law factor #1—instructions to worker
A worker who is required to comply with another person's instructions about when, where, and
how he is to work is ordinarily an employee. This control factor is present if a business has the
right to require compliance with instructions. Conversely, the fact that a worker doesn't
receive any instructions from the firm tends to indicate that the worker isn't an employee.
However, instructions that merely require compliance with government standards are given
little weight. Similarly, in the case of professionals whose methods are dictated by the
techniques and standards of their profession, the absence of instruction isn't enough to
establish an independent contractor relationship.
The requirement that a worker obtain approval before taking certain actions is an example of
instructions.
L was hired by manufacturing company X as a management consultant for
its sales department. According to X, L's responsibilities are: to ensure that
the sales department is fully staffed; to ensure that all materials used by
the sales agents are stocked and available; and to review all sales
contracts. X requires L to secure prior approval: to hire and/or fire within
the sales department; to purchase additional materials, as needed by the
sales agents; and to accept any sales contract prepared by the sales
department. X's requirement that L secure prior approval is evidence of
control over L's behavior in the performance of L's services. (Independent
Contractor or Employee, IRS Training 3320-102 (Rev 10-96), Lesson 2,
The Common Law Standard, Behavioral Control, Ex. 1)
The fact that a worker is instructed to wear a business uniform or other identification, or place
the business's name on his vehicle does not necessarily indicate that he is an employee of the
business. If the nature of the worker's occupation is such that he must be identified with the
business for security purposes (e.g., to gain access to a customer's home or workplace),
wearing a uniform or placing the business's name on a vehicle is a neutral fact in analyzing
whether an employment relationship exists.
Common-law factor #2—training of worker
When a business trains a worker either by requiring an experienced employee to work with the
worker, by corresponding with the worker, by requiring the worker to attend meetings, or by
using other methods, this factor indicates that the business wants the services performed in a
particular method or manner.
Periodic or on-going training provided by a business about procedures to be followed and
methods to be used is “strong evidence” of an employer-employee relationship. (Independent
Contractor or Employee, IRS Training 3320-102 (Rev 10-96), Lesson 2, The Common Law
Standard, Behavioral Control) However, IRS auditors are told that not all training rises to this
level. Specifically, they are instructed to disregard the following types of training, which might
be provided to either independent contractors or employees:
... Orientation or information sessions about the business's policies, new product
line, or applicable statutes or government regulations; or
... Programs that are voluntary and are attended by a worker without
compensation. (Independent Contractor or Employee, IRS Training 3320-102
(Rev 10-96), Lesson 2, The Common Law Standard, Behavioral Control)
Common-law factor #3—integration into business operations
Integration of a worker's services into a business' operations generally shows that he is
subject to the business' direction and control. When the success or continuation of a business
depends to an appreciable degree upon the performance of certain services, the worker who
performs them must necessarily be subject to a certain amount of control by the owner of the
business.
Thus, “certified homemakers” were employees of the private agency that placed them in
clients' homes (under a state program to provide homemaking services to persons who met
certain financial and medical requirements) in part because the homemakers were essential to
the agency's business—in fact, they were the agency's business. According to a district court,
independent contractors normally provide services that are tangential or supplemental to the
main work of the hiring party.
Similarly, a professional musician who performed with Rod Stewart's rock band during its 13month world tour was an integral part of (and therefore an employee of) the band while on
tour. Although the taxpayer wasn't a permanent band member, he was required to tour,
travel, and perform according to the band's scheduled performances. Moreover, Stewart had
influence over what the taxpayer wore on and off the stage, which instruments he brought
with him and played, and which songs he performed.
Common-law factor #4—requirement that services be rendered personally
If a business requires that services be rendered personally, the business probably is interested
in the methods used to accomplish the work, indicating control, as well as in the results.
A business shouldn't insist on an independent contractor's having to
perform the services personally (unless the contractor's personal services
are central to the agreement). Instead, a business should give the
independent contractor the right to designate who may perform the
services, or disavow any interest in how the contractor performs his work.
Common-law factor #5—hiring, supervising, and paying assistants
If a business hires, supervises, and pays assistants for a worker, this factor generally shows
control over the worker on the job. However, if the worker hires, supervises, and pays his own
assistants under a contract which provides both that the worker is to supply materials and
labor and that the worker is responsible only for the attainment of a result, this factor
indicates that the worker is an independent contractor.
A business should not hire, supervise, or pay an independent contractor's
assistants. It should expressly allow the contractor to hire, supervise, and
pay his own assistants. The agreement should disavow that the contractor
is acting in the capacity of foreman or employer representative when he
hires, supervises and pays his own assistants.
Common-law factor #6—continuity of the relationship
A continuing relationship between a business and a worker indicates that an employeremployee relationship exists. A continuing relationship may exist where work is performed at
frequently recurring although irregular intervals. Thus, a professional musician who traveled
and performed with a rock band during its 13-month world tour was held to be an employee,
even though he wasn't a permanent member of the band and worked for others during that
period.
To the extent it is possible to do so; a business should avoid continuing
relationships. Each contract should end on completion of the task at hand.
An independent contractor shouldn't be put “on call” or be responsible for
reporting whenever work is available.
Common-law factor #7—setting work hours
When a business sets the hours of work for a worker, this factor indicates control over the
worker. By contrast, an independent contractor normally sets his own hours.
IRS now views the ability to set the hours of work as a factor of lesser importance in
determining whether a worker is an employee or an independent contractor. It recognizes that
modern communications have increased the ease of performing work outside normal business
hours, while flexibility in setting hours may improve morale and retain valued workers. As a
result, it tells its agents that flexible hours are now consistent with either independent
contractor or employee status.
Common-law factor #8—requirement of full-time work
A business that requires a worker to work full time has control over his time and impliedly
restricts him from doing other gainful work. An independent contractor, on the other hand, is
free to work when and for whom he chooses.
IRS recognizes that the full-time-work factor is no longer significant evidence of a worker's
status. In today's economy, whether a worker performs services full- or part-time is “a neutral
fact” due to changes in business. Many workers hired on a part-time basis due to cutbacks and
downsizing may be either independent contractors or employees. Similarly, working full-time
for one business is also consistent with either independent contractor or employee status. An
independent contractor may work full-time for one business because he can't get other
contracts, or because the nature of the work or the contract by its terms requires a full-time,
exclusive effort. Additionally, an employee may moonlight by working for a second employer
after regular business hours. As a result, whether services are performed full time for one
business “is no longer useful evidence.”
Common-law factor #9—working on employer premises
The fact that a business requires work to be performed on the business's premises suggests
control over the worker (if the work could be done elsewhere). Work done off the business'
premises, such as at the worker's office, indicates some freedom from control. The importance
of this factor depends on the nature of the services involved and the extent to which an
employer generally would require employees to perform similar services on the employer's
premises. Control over the workplace is indicated, for example, when the business has the
right to compel the worker to travel a designated route, to canvass a territory within a certain
time, or to work at specific places as required.
An independent contractor should be required to perform the work at his
own office or other workplace, rather than being allowed to use the
business' desk space, computers, telephone etc. If the contractor must
occasionally use the business' premises, the contractor should be required
to maintain a separate business address. To the extent it is possible to do
so, a business should not require drivers, salespersons, etc., to travel a
designated route, to canvass a territory within a certain time, or to work at
specific places.
Common-law factor #10—setting the order or sequence of work
If a worker must perform services in the order or sequence set by a business, this factor
shows that the business is in control of the worker. The worker is not free to follow his own
pattern of work but must follow the established routines and schedules of the business. Often,
because of the nature of an occupation, the business does not set the order of the services or
it may set the order infrequently. It is sufficient to show control, however, if the business
retains the right to do so.
A business should try to avoid requiring an independent contractor to
perform services in an order or sequence. The contractor should have the
freedom to follow his own routines and schedules.
Common-law factor #11—requiring oral or written reports
A business's requirement that a worker submit regular oral or written reports indicates a
degree of control over the worker. However, the daily and weekly reports filed by a worker
with his employer were given no weight by IRS in determining his status as an employee or
independent contractor, where there was no formal procedure for filing these reports.
An independent contractor should not be required to submit regular oral or
written reports.
Common-law factor #12—paying worker by hour, week or month
Payment by the hour, week, or month generally points to an employer-employee relationship,
provided that this method of payment is not just a convenient way of paying a lump sum
agreed upon as the cost of a job. Payment made by the job or on a straight commission
generally indicates that the worker is an independent contractor.
However, IRS recognizes that in some lines of business, such as law, it is typical for
independent contractors to be paid on an hourly basis.
In general, a business should avoid paying an independent contractor by
the hour, week, or month as this is a strong indication that an employeremployee relationship exists. It shouldn't guarantee a minimum salary,
offer fringe benefits, or provide a drawing account without requiring him
to repay any excess drawn over commissions earned. A business should
pay an independent contractor by the job or on a straight commission
basis.
Common-law factor #13—payment of worker's business and/or traveling
expenses
If a business ordinarily pays a worker's business and/or traveling expenses, he is usually an
employee. An employer, to be able to control expenses, generally retains the right to regulate
and direct the worker's business activities.
A business should avoid paying an independent contractor's business
and/or traveling expenses. If a contractor wants to bill for expenses, the
business should try to persuade him to estimate his own expenses and
incorporate the expenses into the contract price.
Common-law factor #14—furnishing worker's tools and materials
The fact that a business furnishes sufficient tools, materials, and other equipment tends to
show the existence of an employer-employee relationship. Thus, the fact that an employer
furnished a worker with a computer and related tools, desk and office space, suggested that
the worker was an employee rather than an independent contractor.
An independent contractor should be required to furnish his own tools, materials, and other
equipment necessary to perform the services and sustain his own business.
Common-law factor #15—significant investment by worker
If a worker invests in facilities that are used by the worker in performing services and that are
not typically maintained by employees (such as the maintenance of an outside office rented at
fair value from an unrelated party), this factor tends to indicate that the worker is an
independent contractor. On the other hand, a worker's lack of investment in facilities indicates
dependence on the business for the facilities and therefore indicates the existence of an
employer- employee relationship.
Thus, where a university provided its physician faculty members—who both taught and
practiced medicine at various university facilities—with all necessary equipment and support
personnel, handled all financial aspects of the physicians' practices, including billing and
collection, and paid all of the professional expenses of the physicians (e.g., license fees,
membership fees in medical societies, malpractice insurance, etc.), these facts showed that
the physicians had no investment in buildings or equipment, no unreimbursed business
expenses, and ultimately no risk of loss. These factors weighed heavily in convincing IRS that
the physicians were employees of the university and not independent contractors to any
extent.
In determining whether investment in facilities indicates employee or independent contractor
status, special scrutiny is required with respect to certain types of facilities, such as home
offices.
This requirement of “special scrutiny” apparently means that IRS will look
closely at home offices where there may be a likelihood that the office is
nothing more than the worker's residence. However, some workers, e.g.,
free-lance writers, legitimately work at home and have only a small
investment in a personal computer and related equipment.
A business should try to work with independent contractors who
significantly invest in facilities (e.g., a private office) that are used by
them in performing services and are not typically maintained by
employees. It shouldn't rely on the fact that the contractor has invested in
his own facilities if the facilities are not required to perform the services in
question, and it shouldn't contract for the right to decide how the facilities
will be used. For example, if an independent contractor uses his own truck
but the firm that hired him also uses it as one of its own trucks (e.g., the
firm sets the order and time for deliveries, pays for all upkeep and repair,
or restricts the contractor from using the truck as he chooses), then the
contractor's investment loses its significance.
Common-law factor #16—realization of profit or loss by worker
A worker who can realize a profit or suffer a loss as a result of his services is generally an
independent contractor, but a worker who cannot is an employee. For example, if a worker is
subject to a real risk of economic loss due to significant investments or a bona fide liability for
expenses, such as salary payments to unrelated employees, this factor indicates that the
worker is an independent contractor. The risk that a worker will not receive payment for
services, however, is common to both independent contractors and employees and thus is not
a sufficient economic risk to support treatment as an independent contractor.
A business should try to deal with an independent contractor who bears
the risk of capital investment in his own independent business. It should
look for a contractor who: hires, directs and pays his own assistants; has
his own office, equipment, materials and/or other work facilities; has
continuing and recurring liabilities or obligations (e.g., rent, upkeep on
equipment); has his success or failure hinging on the relation of his
receipts to his expenditures; agrees in advance to perform specific jobs for
specific prices and to pay expenses related to the services performed; and
has an independent reputation (i.e., his services affect his own reputation
rather than the reputation of those who hire him).
Common-law factor #17—working for more than one business at a time
If a worker performs more than minimal services for a number of unrelated businesses at the
same time, this factor generally indicates that the worker is an independent contractor.
However, a worker who performs services for more than one business may be an employee of
each of the businesses, especially where the businesses are part of the same service
arrangement.
Sister companies X and Y are both parties to a service agreement with company A. A supplies
X and Y with a worker who in fact functions as an employee of both X and Y, despite language
in the contract to the contrary. The fact that the worker works for more than one business at a
time (X and Y) does not show that the worker is not subject to control by both X and Y.
Common-law factor #18—availability of worker's services to the general
public
The fact that a worker makes his or her services available to the general public on a regular
and consistent basis indicates an independent contractor relationship.
A business should look for an independent contractor who has his own
separate identity, has his own office and assistants, holds business
licenses, is listed in the business directories or maintains business listings
in telephone directories, and who advertises in newspapers, trade journals,
magazines, etc.
Common-law factor #19—firm's right to discharge worker
The right to discharge a worker is a factor indicating that he is an employee, and a business
that possesses that right is an employer. An employer exercises control through the threat of
dismissal, which causes the worker to obey the employer's instructions. An independent
contractor, on the other hand, cannot be fired so long as he produces a result that meets
contractual specifications.
Thus, “certified homemakers” were employees of the private agency that placed them in
clients' homes (under a state program to provide homemaking services to persons who met
certain financial and medical requirements) in part because the agency effectively had the
right to fire them (by refusing to allow any particular homemaker to continue working for a
particular client).
On the other hand, an insurance agent who maintained his own office was not an employee of
the insurance company (X) despite the fact that his Agreement with X contained a discharge
provision. The Agreement provided that the agent would not be discharged for unsatisfactory
performance unless he had been given notice and the opportunity to work with X's
management to increase his performance. There was no evidence that an agent who was
deemed to be under-performing was required to alter and conform his professional behavior to
adhere to suggestions made by X company managers or face termination. The court held that
the right to control minimum output is distinct from the right to control the manner and means
by which such minimum output is achieved. As a result, the court concluded that the discharge
provision had no bearing on its examination of the control test.
IRS recognizes that the right to fire workers is no longer as important a factor in indicating
employee status as it once was. It recognizes that in practice, businesses now rarely have
complete flexibility in discharging an employee. When they discharge an employee they may
be liable for pay in lieu of notice, severance pay, “golden parachutes,” or other forms of
compensation. In addition, a business's reasons for terminating an employee may be limited
(by law, contract, or its own practices). As a result, “inability to freely discharge a worker, by
itself, no longer constitutes persuasive evidence that the worker is an independent
contractor.”
Common-law factor #20—worker's right to terminate relationship
If a worker has the right to end his relationship with a business at any time he wishes without
incurring liability, this factor indicates an employer-employee relationship. By contrast, an
independent contractor who walks off the job could forfeit his fee and/or be sued for
nonperformance.
IRS says that a business's ability to refuse payment for unsatisfactory work continues to
be characteristic of an independent contractor relationship, but it recognizes that the right
to terminate is no longer a cut-and-dried indication of a worker's status. Employees aren't
as free to walk away as they once were because they may be sued for substantial damages
resulting from their failure to perform their jobs. On the other hand, independent
contractors may sign short-term contracts for which nonperformance remedies are
inappropriate or negotiate limits on their liability for nonperformance. As a result, IRS
tells its agents that “the presence or absence of limits on a worker's ability to terminate
the relationship, by themselves, no longer constitutes useful evidence in determining
worker status” and that evidence relating to the right to discharge or terminate a
relationship with a worker “should be used with great caution.”