20 CFR 404.1004(a)(2), 404.1004(c), and 404.1026(a)(4)

SSR 72-34

Where Pennsylvania Department of Forests and Waters engaged the services of an individual tradesman, owner and operator of welding and machine shop, for various projects (from July 1960 through March 1964) normally open to competitive bidding, and, where the tradesman received an hourly rate plus reimbursement for materials and supplies, obtained most of the materials and supplies used, furnished his own tools and equipment, planned and devised methods for completing work projects, personally performed the work required [assisted when necessary by employees of the Department of Forests and Waters], filed no reports, followed no schedule, labored under no structured work quota, afforded his work for the State no more priority than that given to an individual customer, and, further, where such work relationship was terminable by either party, the Commissioner affirmed an allowance of credit based on a determination that services by the tradesman were not performed in an employment relationship, hence not covered under State's section 218 agreement under Social Security Act.

The State of Pennsylvania timely requested a review under Section 218(s) of the Social Security Act, as amended, of the Administration's allowance of credit based on a determination that the services performed as a tradesman by an individual for the Pennsylvania Department of Forests and Waters were not performed in an employment relationship and were not covered under the Federal-State Section 218 agreement. The State is of the view that the individual was an employee of the State and that the services performed were covered under the Pennsylvania agreement for coverage of State and local employees.

The facts in this matter establish that the individual was engaged by the Pennsylvania Nursery, a division of the Pennsylvania Department of Forests and Waters, an integral part of the Commonwealth of Pennsylvania, to design and build a large metal tank equipped for the pressurized treatment of timbers with a chemical preservative. The individual was the owner and operator of a welding and machine shop at the time his services were engaged and continued the operation of this business throughout the period July 1960 through March 1964, during which he worked irregularly on various projects for the Pennsylvania Nursery.

The evidence, on which the parties are in substantial agreement, contains the following pertinent information:

1. The projects on which the wage earner worked would normally be open to competitive bidding with a contract for the work being awarded to an independent contractor. However, this procedure involved considerable paperwork and required the approval of various officials at the State capital. To avoid this time-consuming process, an oral agreement was made between the individual and the nursery to the effect that the individual would be carried on the records as a part-time employee and paid from the regular salary account. The superintendent of the Pennsylvania Nursery stated the individual "was reimbursed for materials and supplies, and paid at the effective rate of $3.00 an hour, as he was actually considered to be an independent contractor by Penn Nurseries, but time prohibited us from carrying him except on the regular payroll as an employee."

2. The highest hourly wage rate the individual could be paid under his State job classification was $1.80. Therefore, it was necessary to adjust the payroll records to show more hours than he actually worked in order that the agreed wage of $3 per hour was actually paid. Also, reimbursement for the materials and supplies furnished by him (at the rate of $1.80 per number of hours necessary to cover the amount of reimbursement) was made as wage payments and carried on the regular payroll account.

3. The individual was paid a total of $1,213.20 in wages for 1960 which included reimbursed expenses of $751.30. In 1963, he had total wage payments of $1,255.32 which included $321.48 he billed the Pennsylvania Nursery for supplies. Also in 1964, he had total wage payments of $134.49 which included $64.14 for supplies. The amount of billing for supplies included in his wage payments for 1961 and 1962 was unknown.

4. The individual was "hired" at various times from July 1960 through March 1964 when the need for his services arose. However, the nursery did not have first call on his services since he was continuing to operate his welding shop and he worked on the nursery projects when he had time available.

5. The individual did the planning and devised the methods for completing the work projects and furnished the tools and equipment with which he worked as well as obtaining most of the materials and supplies used. While most of the work was done at the nursery, there is indication that some of the small jobs were done at his shop with the State receiving no more priority than an individual customer.

6. The individual did not employ anyone to assist him. If he required assistance on a project, employees of the nursery provided whatever help he needed.

7. He was not required to regularly produce any certain amount of work or to follow any routines or schedules established by the nursery. He was not required to make any reports to the nursery.

8. It is indicated that either party could have terminated the work relationship at any time without incurring any liability.

Section 210 of the Social Security Act, as amended, reads in pertinent part as follows:

For the purpose of this title --

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(j) The term "employee" means --

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(2) any individual who, under the usual common law rules, applicable in determining the employer-employee relationship, has the status of an employee . . .

Subpart K of Social Security Regulations No. 4, in pertinent part, provides as follows:

404.1004 Who Are Employees. --

* * * * * * *

(c) Common-Law Employees. -- (1) Every individual is an employee if under the usual common-law rules the relationship between him and the person for whom he performs services is the legal relationship of employer and employee.
(2) Generally, such relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished; that is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so. The right to discharge is also an important factor indicating that the person possessing the right is an employer. Other factors characteristic of an employer, but not necessarily present in every case, are the furnishing of tools and the furnishing of a place to work to the individual who performs the services. In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result, he is an independent contractor. An individual performing services as an independent contractor is not as to such services an employee under the usual common-law rules . . .

The State is of the view that an employment relationship existed between the individual and the Pennsylvania Nursery. The State contends that all the necessary procedures involved in the hiring of an employee by the State were met in this case. It is further contended that the individual was subject to the degree of direction and control to be considered an employee of the nursery. In this regard the following points were made:

1. While the individual was a highly skilled employee and did not need or receive instructions in doing his work, the nursery had the right to give such instruction.

2. The individual's personal services were necessary to the continuing operation of the nursery and all the assistants he required were Commonwealth employees.

3. His services were required on a continuing basis thereby giving permanence to the relationship.

4. Most of the work was performed at the nursery with payment made by the State.

5. It was customary for a welder to furnish his own equipment.

6. The individual had no investment in the facilities used at the nursery and he was not in a position to realize a profit or suffer a loss as the result of his services.

7. The nursery could have discharged him at any time or he could have quit without incurring any liability.

The State indicates that it was clearly the intent of the State to establish an employment relationship in the case. Otherwise, it could be inferred that the State had acted illegally in order to circumvent the requirements for purchasing constructual services on a bid basis.

It is the position of the Social Security Administration that no employer-employee relationship existed between the individual and the Commonwealth of Pennsylvania, Department of Forests and Waters, with respect to the services he performed for the Pennsylvania Nursery during the years 1960 through 1964. The arrangement between the individual and the Pennsylvania Nursery appears to have been made primarily to avoid the Commonwealth's requirements and procedures relating to the awarding of contracts requiring competitive bidding and approval.

The superintendent of Pennsylvania Nursery had admitted that the individual was actually considered to be an independent contractor and that the "employment" arrangement was made in order to expedite the work projects. The wage earner continued to operate his business throughout the period he worked for the nursery and has stated that he considered himself to be self-employed when working for the nursery. His services were obtained by the nursery only whenever the need for his skills arise and there is evidence that the nursery received no priority over other patrons of his business. He was given a free rein in his work, with the nursery being interested only in the product and not the manner or means by which the resulting product was accomplished. The superintendent of the nursery neither controlled nor had the right to direct or control his activities to the degree required to establish an employment relationship under common law. The control that was exercised was of the type usually evident in an arrangement for the services of an independent contractor.

The Commissioner found, on review pursuant to the State's request, that an employment relationship did not exist between the individual and the Pennsylvania Nursery for the period in question. On the basis of this finding, the Commissioner affirmed the allowance of credit.

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