Understanding Employee Classifications III: Relationship

The laws governing employment status are changing, as more American workers take up independent contracting as a side hustle or survive the downturn in the economy. Employers who accidentally or deliberately misclassify their workers as independent contractors but who meet all the criteria the IRS sets for full-time employees are likely to be on the hot seat.   

The courts and Department of Labor rely on the IRS 20-Factor Test, a series of questions within three employment designations (Behavioral Control, Financial Control, and Relationship Factors) to determine whether a worker is an independent contractor or employee.   

Just because the employer signs a worker up as a 1099 contractor doesn’t mean the employer isn’t breaking these rules. If you’re sued, the courts look at several factors, with the IRS rules as the baseline, to determine if you broke the law.  

Today, the legal test for whether your workers are independent contractors or employees rests with the IRS, who has classified work status into three categories. This blog is the third in the series covering these important IRS designations. Our last blog explained the IRS Behavioral Control Category. This final blog in the series will discuss Relationship Factors as defined by the IRS.  

Employee or Independent Contractor?   

IRS 20-Factor Test: Relationship Factors  

Employees receive more rights and benefits than independent contractors. Most independent contractors say these are rights that are worth fighting for, including workers’ compensation for on-the-job-injuries, unemployment, health insurance, vacation, and more. For employers to stay legal, they must carefully review IRS rules governing how the worker and the company perceive their relationship. The IRS has several key guidelines to consider:  

  • Written contracts don’t necessarily spell out whether the worker is independent or an employee. If the worker performs services that are essential to the business, instead of being an add-on service, they may be considered an employee under IRS rules.  
  • The IRS says, while businesses don’t generally offer employee benefits to independent contractors, it doesn’t mean that they can’t. According to the IRS, the lack of insurance, pension, sick days, and health insurance doesn’t mean the worker is an independent contractor.  
  • The issue is really how permanent is the relationship. If the company hires the worker assuming that they will stay forever instead of for a project, this could be ruled in favor of an employer/employee relationship.  
  • However, if the worker performs the service for multiple unrelated companies, this is a signal that they are an independent contractor. If the worker puts out a shingle to other businesses letting them know they can perform the service for them, they are an independent contractor.  
  • Too, if the worker can quit without breaching a contract or if the employer hires them “at-will,” the worker could be considered an employee. An independent contractor is more likely to spell out the terms of the contract, terms, and the deliverables.  

It’s essential to recognize that the IRS takes all three categories into account along with the 20-or so categories within the designation. As the rules that govern our workforce grow more complex, aren’t you glad you have a partner like FoxHire to help you with your workforce? Talk to our team to find out how we can help.