INDEPENDENT CONTRACTORS

Who are independent contractors? 


Independent Contractors are small business owners. They contract with clients to provide services. According to the Internal Revenue Service (IRS), the general rule is that an individual is an independent contractor if the payer has the right to control or direct on the result of the work and not what will be done and how it will be done. 


What fields do independent contractors work in? 


Independent Contractors work in almost every field. They range from freelance writers to product distributors to truck drivers.


How does the government determine who is an independent contractor? 


The IRS, Department of Labor (DOL), and state agencies use different tests to classify workers. The most common tests are the IRS 20-Factor Test, the ABC Test, and the Economic Realities Test. 


The IRS-20 Question Test, also called the “Right-to-Control Test”, was designed to evaluate who controls how the work is performed. The test offers 20 criteria to help determine a worker’s status, though the IRS determines the weight of each factor on a case-by-case basis.  Criteria includes level of intrusion, the amount of training required, extent of personal services and how many companies independent contractors work with at one time. 


Under the ABC Test, a worker is considered an employee and not an independent contractor, unless the hiring entity satisfies as three of the following conditions: 

  • The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;

  • The worker performs work that is outside the usual course of the hiring business; and 

  • The worker is customarily engaged in an independently established trade, occupation or businesses of the same nature as that involved in the work performed 


Under the Economic Realities Test the employer-employee relationship is tested using “economic realities” instead of “technical concepts”. The U.S. Supreme Court has indicated that there is no single rule or test for determining whether an individual is an independent contractor or an employee for the Fair Labor Standards Act (FLSA). Among the factors which the Supreme Court considered significant are: 


  • The extent to which services rendered are an integral part of the principal’s business 

  • The permanency of the relationship 

  • The amount of the contractor’s investment in facilities and equipment 

  • The nature and degree of control by the principal 

  • The alleged contractor’s opportunities for profit and loss 

  • The amount of initiative, judgement or foresight in open market competition with others required for the success of the independent contractor 

  • The degree of independent business organization and operation 


What does the test look like under the new proposed rule? 


The new proposed rule directs employers to include exclusivity as a consideration under the permanency factor, but it acknowledges that simply having multiple jobs does not weigh in favor of independent contractor status. Factors in the economic realities test may include:

  • The amount of skill required for the work.

  • The degree of permanence of the working relationship.

  • The worker's investment in equipment or materials required for the task.

  • The extent to which the service rendered is an integral part of the employer's business.