This course defines the terms employer and employee, and explains the process for using the common law control test to determine whether a worker is an employee.
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- Why is it important to determine whether an employer and employee relationship exists?
- What is the definition of an employee for purposes of Social Security?
- What is the definition of an employer for purposes of Social Security?
- What is the common law control test and how does it relate to employer and employee relationship determinations?
- What is the history of the common law rules in determining employer and employee relationships?
- What if a worker meets the common law control test?
- What if a worker does not meet the common law control test?
- How do you implement the common law test?
- What are the factors of the common law test?
- Are there factors of the common law test that are not material to an employment determination?
- What are some other aspects of a job arrangement that may show a worker is an employee? Several of the following factors re-emphasize points made in question 9.
- What are some aspects of the job arrangement or business venture that may show self-employment status?
- Are there other tools that can be used to aide in the process of making employer and employee relationship determinations?
- Is it always necessary to make an independent relationship determination specifically regarding Social Security coverage or can another agency determination be used?
- So how does all of this apply to a real life situation? See the example below for a short analysis.
To apply Social Security coverage correctly, it is essential that it be known whether an employee and employer relationship exists between the individual (worker) performing the services and the person or firm for which those services are being performed.
Any worker who, under the usual common law rules applicable in determining the employer and employee relationship, has the status of an employee. Thus, making a determination whether a relationship exists requires more development than looking at a paycheck. It requires looking at each worker individually and making a decision based on the facts related to that person. To ease the process of making relationship determinations, we created the common law control test.
A person can be an employer if he employs one or more employees. Employers can be an individual, a corporation, a partnership, an entity, or other types of organizations. Although a person may be an employer, and services may be performed for his purposes, this does not constitute employment or that an employer and employee relationship exists.
The common law control test is the basic test, using the common law rules, for determining whether a relationship exists between the worker and the person or firm that they work for. Under the common-law test, the employer has the right to tell the employee what to do, how, when, and where to do the job. As you will see in the following questions and answers, there are factors, or elements, which indicate such control over the details of a person’s work. For a complete list of factors, refer to question 9.
The 1950 and subsequent amendments to the Social Security Act use the common-law rules in determining employer and employee relationships. In enacting the 1950 amendments, Congress expressed the view that these rules should be realistically, not restrictively, applied. This intent appears in Conference Report No. 2771, which accompanied the House bill that was the forerunner of the 1950 amendments. The Report reiterates and endorses a statement made in the House Report on the 1939 amendments to the effect that a restrictive view of the employer and employee relationship should not be taken in administering the old-age and survivors insurance system. The Conference Report on the 1950 amendments concluded that the 1939 statement applies equally to the 1950 amendments, and that the law contemplates a realistic interpretation of the common-law rules.
A worker is considered an employee if their relationship with the employer meets the common-law test. Even if the employer does not give the employee orders on what to do, including, how, when, and where to do the job, he or she only needs the right to do so for the worker to be considered an employee.
Most likely, if the test does not reflect the existence of a relationship, they are a contractor or are self employed.
The primary consideration when applying the common law test is to determine who has the right to control two basic elements; WHAT MUST BE DONE and HOW IT MUST BE DONE. This requires the application of judgment to facts and circumstances. A decision based on an incomplete set of facts may be wrong. It is, therefore, imperative in resolving questions of coverage to obtain complete factual information. Each factor of the test must be considered and weighed in the light of all circumstances. No one factor is controlling. They are intended to serve as guides in reaching a reasonable conclusion. The factors can be seen below in question 9.
The common-law control test is used to determine whether a worker is an employee. The test involves a great degree of subjectivity, and even with all the facts, it may still be difficult to say whether the services rendered were performed as an employee. Finding that a worker is an employee is a finding that the person was subject to control over when, where, and how (the means and methods) to perform the work. This finding does not mean the control is actually exercised—only that the employer has the right to exercise it.
Each of the following factors should be closely weighed against the worker and the employer.
Actual instruction or direction of worker
A worker who is required to comply with instructions about when, where and how to work is ordinarily an employee. Some employees may work without receiving instructions because they are highly proficient in their line of work and can be trusted to work to the best of their abilities; however, the control factor is present if the employer has the right to instruct. The instructions may be in the form of manuals or written procedures which show how the desired result is to be accomplished.
Training is a factor of control because it is an indication that the employer wants the services performed in a particular method or manner. This is especially true if the training is given periodically or at frequent intervals. The training may be by an experienced employee, by correspondence, by required attendance at meetings, or by other methods. An independent contractor uses his own methods and receives no training from the purchaser of the services. In fact, it is usually the methods of the independent contractor which bring the contractor to the attention of the purchaser.
Direction and control are usually present if a person's services are integrated into the business operation of the employing individual or firm. To decide whether integration exists, determine the scope and function of the business. Then, determine whether the services of the individual are merged into it. When the success or continuation of a business depends to an appreciable degree upon the performance of certain kinds of services, the people who perform those services must necessarily be subject to a certain amount of control by the owner of the business.
Services to be rendered personally
A requirement to do the work personally is an element of control because it indicates that the employer is interested in the methods as well as the results. The employer is interested not only in getting a desired result but also in who does the job. Lack of control may be indicated when the person has the right to hire a substitute without the permission or knowledge of the employer.
Hiring and supervising of assistants
If the employer hires, supervises, and pays others on the same job as the worker, the employer is usually exercising control over all the people on the job. Thus, all the workers are employees. A worker sometimes hires, supervises, and pays other people on the job. If this is done under a contract which provides that the worker furnish labor and materials and is responsible only for the attainment of a result, the worker is an independent contractor. On the other hand, if the worker hires, supervises and pays other people at the direction of the employer, the worker may be acting as an employee in the capacity of a foreman for, or representative of, the employer.
Duration of relationship
An individual who has a continuing relationship with the person for whom he works is more likely to be an employee than one who is engaged for a single job or for sporadic or infrequent jobs. Continuing services may be inferred if the work is performed at frequently recurring though somewhat irregular intervals, either on call of the employer or whenever the work is available. If the arrangement contemplates continuing or recurring work, the relationship is considered permanent even if the services are rendered on a part-time basis, they are seasonal in nature, or the individual actually works only a short time.
Hours of work
The person whose hours of work are set by the employer is usually an employee. This condition bars that person from being master of his or her own time, which is a right of the independent contractor. Where, because of the nature of the occupation, fixed hours are not practical, a requirement that the person work at certain times is an element of control.
A requirement that a worker devote full time to the business of the employer is a control factor. It gives the employer control over the amount of time the person spends working and impliedly restricts the person from doing other gainful work. An independent contractor, on the other hand, is free to work when, and for whom, he or she chooses. Full time does not necessarily mean an 8-hour day or a 5-day week. Its meaning may vary with the intent of the parties, the nature of the occupation, and customs in the locality. These conditions should be considered in defining “full-time.”
Full-time services may be required even though not specified in writing or orally. For example, a worker may be required to produce a minimum volume of business, which requires devoting full working time to that business. Or, the worker may not be permitted to work for anyone else. Thus, it necessarily requires full-time work to earn a living.
Place of work
The fact that the worker does the work on an employer's premises is not control in itself. However, it does imply that the employer has control, especially where the work is of such a nature that it could be done elsewhere. A person working in the employer's place of business is physically within the employer's direction and supervision. The use of desk space and of telephone and computer provided by an employer places the worker within the employer's direction and supervision unless the person has the option as to whether to use these facilities.
The fact that work is done off the premises does indicate some freedom from control. However, it does not by itself mean that the person is not an employee. In some occupations the services are necessarily performed away from the premises of the employer, i.e., Alternate Duty Stations (ADS). This is true, for example, of employees of construction contractors or taxicab drivers.
Order of services
A requirement that a worker perform services in the order or sequence set by the employer is a factor of control because it shows that the worker is not free to follow his own pattern of work, but must follow the established routines and schedules of the employer.
Often, because of the nature of an occupation, the employer either does not set the order of the services or sets them infrequently. It is sufficient to show control, however, if the employer retains the right to do so. The outside commission salesperson for example, usually is permitted great latitude in mapping out activities and may work “on his own” to a considerable degree. In many cases, however, at the direction of the employer the worker must report to the office at specified times, follow up on leads and perform certain tasks at certain times. Such directions interfere with and take preference over the salesperson's own routines or plans, thus indicating control.
A requirement that regular oral or written reports be submitted to the employer is an element of control. It shows that the worker is compelled to account for his actions. Such reports are of use to the employer for present controls or future supervision; that is, they enable the employer to determine whether instructions are being followed or, if the worker has been “on his own,” whether instructions should be issued.
Manner of payment
Payment by the hour, week, or month generally points to an employer and 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 doing a job. The payment by a firm of regular amounts at stated intervals to a worker is a strong indication that an employer-employee relationship is present. (The fact that payments are received from a third party, e.g., tips, fees, is not controlling in determining whether an employment relationship exists.) The firm assumes the hazard that the services of the worker will be in proportion to the regular payments, thus warranting the assumption that, in order to protect its investment, the firm has the right to direct and control the performance of the worker's services. It is also assumed in absence of evidence to the contrary that the worker, in consideration of the payment of remuneration upon such basis, has agreed that the firm shall have such right of control. It is obvious that the firm expects the worker to meet the standards of diligence and attention to duty necessary to justify the payments.
Generally, a worker is an employee if he is guaranteed a minimum salary or is given a drawing account of a definite amount at stated intervals and is not required to repay any excess drawn over commissions earned. If payment is made by the job or on a straight commission basis, it generally indicates that the worker is an independent contractor. Payment by the job includes a lump sum which is computed by the number of hours required to do the job at a fixed rate per hour. Such a payment should not be confused with payment by the hour.
Payment of business expenses
A person is ordinarily an employee if the employer pays the person's business and traveling expenses. Controlling the expenses indicates the right to regulate and direct the worker's business activities. Conversely, a worker who is paid on a job basis and who has to take care of all incidental expenses is generally an independent contractor. The worker who does not need to account for expenses is free to establish the methods and means of work.
Furnishing tools and materials
The fact that an employer furnishes tools, materials, etc., tends to show the existence of an employer and employee relationship. Such an employer can determine which tools the worker is to use and, to some extent, in what order and how they shall be used. Independent contractors ordinarily furnish their own tools. However, in some occupational fields, e.g., artisans, it is the custom for workers to furnish their own tools. They are usually small hand tools and are inexpensive. Such a practice does not necessarily indicate a lack of control over the services of the worker.
Investment by a person in facilities used in performing services for another is a factor which tends to establish an independent contractor status. On the other hand, lack of investment indicates dependence on the employer for such facilities and the existence of an employer and employee relationship.
In general, facilities include equipment or premises necessary for the work, such as office furniture, tools, machinery, etc. This term does not include tools, instruments, clothing, etc., that are provided by employees as a common practice in their particular trade, nor does it include education, experience, or training. In order for an investment to be a significant factor in establishing that an employer-employee relationship does not exist, it must be real, it must be essential, and it must be adequate.
Profit or loss possibility
The person who is in a position to realize a profit or suffer a loss as a result of his services is generally an independent contractor. The individual who is an employee is not in such a position. “Profit or loss” implies the use of capital by an individual engaged in an independent business. Thus, opportunity for higher earnings, such as from pay on a piecework basis or the possibility of gain or loss from a commission arrangement is not considered as profit or loss. Whether a profit is realized or loss suffered is generally dependent upon management decisions; that is, the one responsible for a profit or loss is free to use ingenuity, initiative, and judgment in conducting a business or enterprise of his own.
Opportunity for profit or loss may be established by one or more of a variety of circumstances, e.g., an individual:
- Hires, directs and pays assistants;
- Has own office, equipment, materials or other facilities for doing the work;
- Has continuing and recurring liabilities or obligations, and success or failure depends on the relation of receipts to expenditures;
- Agrees to perform specific jobs for prices agreed upon in advance and pay expenses incurred in connection with the work; or
- Performs services, and assistants perform services, which establish or affect his own business reputation and not the reputation of those who purchase the services.
Working for a number of people
The person who works for a number of persons or firms at the same time is ordinarily not an employee. The connection with a number of firms keeps the worker free from the control of any one firm. It is possible, however, that a person may work for a number of people or firms and still be an employee of one or all of them. For example, a bookkeeper may perform services for 4 firms, 2 hours every working day for each firm, on each firm's premises and be so controlled and directed as to be an employee of all of them.
Availability of services to the public
Individuals who make their services available to the general public are usually independent contractors. In order to make their services available to the public, they must necessarily refrain from being controlled by others. Employees, on the other hand, are usually controlled and directed by their employer to such an extent that they are not free to sell their services to the public. Employees are not in a position to regulate their working time or to divide their services as they see fit.
Individuals may hold their services out to the public in a number of ways. For example, they may:
- Have their own “products” in front of their home or office;
- Hold business licenses;
- Be listed in business directories;
- Maintain business listing in telephone directories; or
- Advertise in newspapers, trade journals, magazines, etc.
Right to discharge
The right to discharge is an important factor; it indicates that the person having this right is an employer. He exercises control through the ever present threat of dismissal which causes the worker to obey instructions. An independent contractor, on the other hand, cannot be fired as long as he produces a result which measures up to contract specifications. Sometimes an employer's right to discharge is restricted because of a contract with a labor union. Such a restriction does not detract from the existence of an employer and employee relationship.
Right to quit at any time
An employee normally has the right to end the relationship with the employer at any time he wishes without incurring liability. An independent contractor usually agrees to complete a specific job and is responsible for its satisfactory completion or is legally obligated to make good for failure to complete the job.
YES. There are two factors that are often present which are not germane to the determination as to whether a bona fide employer and employee relationship was created or existed. Their existence should serve as an alert for complete factual development and careful appraisal of the relationship between the parties. These factors are as follows:
- Motive— There may be a clear indication that the purpose of the arrangement was to secure coverage, e.g., services were performed only for a period of time long enough for the domestic to acquire an insured status. The fact that the arrangement was made for such a purpose is not material to the finding as to the existence of an employment relationship.
- Natural Love and Affection— Services may be performed by a member of a family and money given to the family member by reason of the natural love and affection between family members and without the presence of an understanding or agreement as to the nature of the services to be performed, when and how they are to be performed and the amount of remuneration to be paid. Under such circumstances there is no employment relationship. However, the existence of love and affection between family members does not preclude the existence of an employment relationship between them. Service may be rendered concurrently by reason of love and affection and by reason of a contract of employment.
- the employer may fire the worker;
- the employer furnishes the worker with tools or equipment and a place to work;
- the worker receives training from the employer, or is required to follow the employer's instructions;
- the worker must perform the job personally;
- the worker does not hire, supervise, or pay assistants (unless employed as a foreman, manager, or supervisor);
- the employer sets the work hours, requires the individual to work full-time, or restricts the individual from working for others;
- the employer pays the worker's business or travel expenses; or
- the worker is paid by the hour, week, or month.
When a person:
- makes a profit or suffers a loss;
- is hired to complete a certain job and may be liable for damages if he/she quits before the job is completed;
- works for a number of persons or firms at the same time;
- advertises to the general public that he/she is available to perform services; or
- pays his own expenses and provides the equipment and work place.
YES, Form SSA-7160-F4, Employment Relationship Questionnaire (View PDF Version), was designed for use in developing the question of employer and employee relationships, except where the worker is an officer of a corporation. It is a questionnaire, for use by SSA, which elicits information for use under both the common-law control test and the occupational group test. Since this form is designed to gather the comprehensive information needed for developing the employment relationship, specialists are encouraged to use it, but its use is not mandatory. It can also be used by state administrators and other non-SSA employees as a guide for unofficial determinations. Additionally, information may be solicited by other means, as long as complete facts are obtained.
Form SSA-7160-F4 will not furnish adequate information in all cases. It is not to be used as an end in itself—it is only a means toward the desired end of a complete and accurate description of the relationship in question. Where the answers furnished on the questionnaires do not appear to reflect an accurate and complete factual picture of the relationship, obtain supplementary evidence. It may be written records, contracts, written agreements, statements from persons having knowledge of the employment relationship, etc.
A thorough review by the by the State and local specialist or state administrator of the completed questionnaire, and all other evidence in the file, is important. In reviewing the completed questionnaire, keep the following points in mind:
- Are all pertinent questions answered and are they complete?
- Do the answers appear unlikely or improbable?
- Does the evidence represent the complete factual picture?
- Are there discrepancies between the claimant's and employer's answers?
- Do the answers present a realistic pattern?
Unless the evidence meets these conditions, the parties involved should be questioned further and additional evidence secured.
In some cases, the IRS may issue a Private Letter Ruling (PLR) regarding the status of a worker as an employee. No effort should be made to obtain copies of alleged IRS determinations or rulings on employer and employee relationships. If a copy is offered, accept it, but make an independent determination using the criteria mentioned above.
Scenario: Government Technology & Personnel (GTP), a fictitious company designed for the purposes of this example, is a company that furnishes local governments with technical personnel. GTP is contacted by the City of the Eastern Shore, who is in need of a technician to reconfigure the City’s network server. The task is expected to last approximately six months to a year. GTP recruits a technician, from a database that they maintain which lists the skills and abilities of available technicians, to perform the technology services for the City of the Eastern Shore. GTP enters into a contract with the City stipulating that the technician they provide will perform the services for the City, at the City’s municipal building, using materials and equipment provided by the City. The contract further states that the services are to be performed under the supervision City personnel and the technician reports to the City on a daily full-time basis.
The worker prepares a report for GTP that accounts for his time worked and the tasks he engaged. Subsequently, the worker is paid weekly by GTP, who, in-turn, charges the City of the Eastern Shore for the technician’s services. GTP retains the right to terminate the relationship with the technician if the reports, at anytime, fall short of GTP’s expectations, or that of the City’s. However, if the technician is terminated, GTP will provide the City with another technician. The former technician will be paid for services he competed prior to dismissal from GTP and he is forbidden to go to work for the City of the Eastern Shore for the period of time stipulated in the contract (i.e., 6 months).
Answer: The worker is an employee of GTP under the common law rules, not the City of the Eastern Shore.