The Twenty Common Law Factors – a test which may be used by the IRS:

Under the common law, a worker is an employee if the hiring firm (that is, the person or persons for whom services are performed) has the right to control and direct the way they work, not only with regard to the final result, but also with regard to the details of when, where, and how the work is done.
According to the IRS, it is not necessary that the employer actually directs or controls the manner in which the services are performed; it is sufficient if the employer has the right to do so.

1. Instructions

  • A worker who is required to comply with instructions about when, where, and how work is to be done is ordinarily an employee

  • Contractors are not required to follow instructions to accomplish a job

2. Training

  • Training a worker indicates that the hiring firm wants the work done in a particular way

  • Contractors typically do not receive training by the hiring firm

3. Integration

  • Integration of the worker's services into the business operations generally shows the worker is subject to direction and control

  • When the success or continuation of a business depends upon the performance of particular workers, those workers necessarily must be subject to a certain amount of control by the hiring firm

  • Contractors should not perform work that determines the success or continuation of the hiring firm

4. Services Rendered Personally

  • If the services must be rendered personally by the worker it is presumed that the hiring firm wants the work done in a particular way

  • Contractors usually have the right to hire others to do the actual work

5. Hiring, Supervising, and Paying Assistants

  • If the hiring firm hires, supervises, and pays assistants for a worker, that factor generally shows control over the worker

  • Contractors must have the authority to control their own assistants

6. Continuing Relationship

  • A continuing relationship between the worker and the hiring firm indicates that an employer-employee relationship exists

  • Contractors usually work for the hiring firm at irregular intervals, on call, or whenever work is available

7. Set Hours of Work

  • The establishment of set hours of work by the hiring firm is a factor indicating control over the worker

  • Contractors set their own hours of work

8. Full Time Required

  • If the worker must devote substantially full time to the business of the hiring firm, then the hiring firm controls the worker, and restricts the worker from doing other gainful work

  • Contractors should not be restricted from seeking and performing other gainful wor

9. Doing Work on Employer's Premises

  • If the work is performed on the premises of the hiring firm, that factor suggests control over the worker, especially if the work could be done elsewhere

  • Contractors control where they work.  If contractors perform work on the premises of the hiring firm, the firm should not direct or supervise their activities

10. Order or Sequence Set

  • If the hiring firm sets, or reserves the right to set, the order or sequence in which work is to be performed, that factor shows control over the worker

  • Contractors determine the order and sequence of their work

11. Oral or Written Reports

  • A requirement that the worker submit regular or written reports to the hiring firm indicates a degree of control

  • Contractors are hired to produce a final result, and therefore should not be required to submit interim reports

12. Payment by Hour, Week or Month

  • Payment by the hour, week or month generally points to an employer-employee relationship

  • Payment made by the job or on a straight commission generally indicates that the worker is an independent contractor. Contractors may accept periodic payments based on a percentage of work completed, or some other fixed schedule determined before the job begins

13. Payment of Business and/or Traveling Expenses

  • If the hiring firm ordinarily pays the worker's business and/or traveling expenses, the worker is ordinarily an employee. An employer, to be able to control expenses, generally retains the right to regulate and direct the worker's business activities

  • Contractors pay their own incidental expenses

14. Furnishing of Tools and Materials

  • The fact that the hiring firm furnishes significant tools, materials, and other equipment tends to show the existence of an employer-employee relationship

  • Usually contractors furnish their own tools, materials, and other equipment. If the hiring firm provides such items, they should be leased to the contractor at fair market rate

15. Significant Investment

  • Lack of investment in separate facilities, such as maintenance or rental of one's own office, indicates dependence on the hiring firm, and accordingly, the existence of an employer-employee relationship

  • Contractors should be able to do their work without using the hiring firm's facilities. The contractor's investment in their trade must be real, essential and adequate

16. Realization of Profit or Loss

  • Employees do not realize entrepreneurial profit, and are not at risk of loss as a result of their work

  • Contractors should be able to make a profit or suffer a loss as a result of their work

17. Working for More Than One Firm at a Time

  • The hiring firm may restrict its employees from working for another firm, such as a competitor, as a condition of employment

  • Contractors are not restricted from working for more than one firm at a time

18. Making Service Available to General Public

  • Employees work primarily for the hiring firm

  • Contractors make their services available to the general public on a regular & consistent basis

19. Right to Discharge

  • 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 the independent contractor produces a result that meets the contract specifications

20. Right to Terminate

  • Employees have the right to terminate their relationship at any time without liability

  • Contractors are responsible for the satisfactory completion of their contractual obligation, and may be subject to a penalty/legal action if they fail to complete the agreed upon work

The above list is adapted from IRS Revenue Ruling 87-41 Listing the 20 Common Law Factors -- Complete Text (1987-1 CB 296).
  • A summary of legal issues related to the hiring of independent contractors: Independent Contractors: A Manager's Guide and Audit Reference, published by the California Chamber of Commerce, P.O. Box 1736, Sacramento, CA 95812-1736, (916) 444-6670.
  • Another resource when considering hiring independent contractors: The Employer's Legal Guide (1997) by Stephen Fishman, published by Nolo Press. An in-depth and comprehensive discussion of employee vs. independent contractor legal issues is available on-line at Fenwick & West: Publications.
Contract Employment Agencies (such as Bay Area Recruiters, Inc.) can act as Insurance

     Independent contractors are NOT necessarily contract employees. But the issues related to the hiring of independent contractors directly impact the working environment of contract employees.  Indeed, the issues related to the hiring of independent contractors are largely responsible for creating the entire industry of contract employment agencies.  Hiring firms are at risk from the IRS and other agencies whenever they employ independent contractors.

  • One mistake by the hiring firm or its employees, and an independent contractor can be converted into an employee.
  • The IRS now investigates the status of independent contractors in all business audits they conduct. The burden of proof is always on the hiring firm to demonstrate unequivocally that an independent contractor is NOT their employee
  • If the matter goes to court, and the hiring firm wins, the legal cost of successfully defending itself can be huge. If the hiring firm loses, the cost is greater still
  • Contract employment agencies offer the protection that businesses need to avoid problems with the IRS

     It is not surprising that hiring firms seek to protect themselves from legal attack by scrupulously heeding the twenty common law factors and by contacting Bay Area Recruiters, Inc. for recruitment services to meet their temporary recruitment needs. There is little question the recruiters BAR supplies are employees of Bay Area Recruiters, Inc. and not your independent contractor.

     As you can see from the foregoing discussion, a contract employment agency (such as Bay Area Recruiters, Inc.) provide insurance against the risk of the IRS and other government agencies will reclassify independent contractors as employees.

     Please see the section on "The 20 Common Law Guidelines" from the IRS or you can visit this website at: http://www.edd.ca.gov/taxrep/de38.pdf.

This information is not meant as legal advice…please consult a legal or tax advisor for advice concerning specific questions and situations.

Bay Area Recruiters, Inc.

Northern California / Bay Area

Phone:  650.465.9322

E-mail us:  info@BARecruiters.com

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