Independent Contractor or Employee?
In certain circumstances it is difficult to decide whether a person is an
employee or an
independent contractor. The Internal
Revenue Service has provided a 20 factor test in IRS Revenue Ruling 87-41
to help employers make this determination. Following is the 20 factor test as
presented by R. C. Chip Goldsberry, Assistant Director of Personnel Services
for Compensation and Information Systems at Purdue University, in the August,
1992 edition of the NACUBO Business Officer, a journal published
by the National Association of College and University Business Officers (NACUBO):
- an employee is required to comply with instructions
about when, where, and how to work. The employer's right to instruct,
not the exercise of that right, is the key. Instruction may be oral
or in written procedures or manuals.
an independent contractor is hired to provide goods or
services and is not instructed in great detail about how to provide
the goods or services.
- an employee is usually trained by one of the institution's
experienced employees. Training indicates that the employer wants the
services performed in a certain manner.
an independent contractor ordinarily uses his or her own
methods, is hired for his or her expertise, and receives no training
from the institution that purchases services.
- an employee's services are usually integrated into business
operations, generally showing that direction and control are being exercised.
Integration of services into the business operation occurs when the
success or continuation of a business depends to an appreciable degree
on the performance of services that are difficult to separate from the
an independent contractor's services can usually stand
alone and are not integrated into business operations.
- an employee is hired to render services personally.
If the employer is interested in who does the job as well as in getting
the job done, it indicates that the employer is concerned about the
methods used as well as the result of services performed.
an independent contractor is hired to provide a service
and often the employer does not care who performs that job.
- an employee has little control over the hiring, supervising,
and payment of assistants. Such action by an employer generally shows
control over people on the job with whom assistants work.
an independent contractor will hire, supervise, and pay
other workers under a contract in which he or she agrees to provide
materials and labor and is responsible for the attainment of a given
- an employee normally has a continuing relationship with
the person for whom services are performed. Services may be continuing
even though they are performed at irregular intervals, on a part-time
basis, seasonally, or over a short term.
an independent contractor has a defined relationship that
typically ends when the services are completed.
- an employee has set hours of work established by the
employer, indicative of control. Such a condition bars the worker from
allocating time to other work, which is a right of an independent contractor.
an independent contractor tends to establish time use
as a matter of right.
- an employee usually devotes full time to the business
of the employer. Full time does not necessarily mean an eight-hour day
or a five-day week. Its meaning varies depending on the intent of the
an independent contractor is free to work when, for whom,
and for as many employers as desired.
- an employee typically does his or her work on the employer's
premises which implies control, especially if the work could be performed
elsewhere. Someone who works in the employer's place of business is
at least physically within the employer's direction and supervision.
However, performance of work off-site does not, of itself, mean that
no right to control exists.
an independent contractor usually does work that can be
completed on or off the employer's premises.
- an employee often must perform services in a prescribed
sequence, which shows a level of employer control. Here, too, the right
to set the sequence, not the exercise of that right, is the key.
an independent contractor normally is free to perform
services in any manner that produces desired results.
- an employee submits or provides regular written or oral
reports that indicate employer control.
an independent contractor submits reports as specified
by the contract and may provide them in the broadest of terms and with
less frequency than an employee would.
- an employee is usually paid for work by the hour, week,
or month. The guarantee of a minimum salary or the granting of a drawing
account at stated intervals with no requirement for repayment of the
excess over earnings tends to indicate the existence of an employer-employee
an independent contractor is customarily paid by the job
in a lump sum or on a commission basis.
- an employee is reimbursed or paid by the employer for
business and traveling expenses, a factor that indicates control over
an independent contractor is paid on a job basis and normally
has to assume all expenses except those specified by contract.
- an employee usually is furnished by the employer with
any tools and materials needed, which is indicative of employer control
over the worker. In some jobs employees customarily use their own hand
an independent contractor supplies the tools and equipment.
- an employee normally does not have a significant investment
in the facilities used in the job.
an independent contractor often has a significant investment
in facilities used in performing services. Facilities generally include
equipment or premises necessary for the work, but not such items as
tools, instruments, and clothing that are provided by employees as a
common practice in their trade.
- an employee usually does not realize a profit or suffer
a loss as a result of the service provided.
an independent contractor is in a position to realize
a profit or suffer a loss as a result of services provided.
- an employee tends to work exclusively for one employer.
an independent contractor normally works for more than
one employer at the same time.
- an employee usually does not make services available
to the general public. an independent contractor makes
services available to the general public. "Making services available"
may include hanging out a shingle, holding a business license, and having
advertising and telephone directory listings.
- an employee is subject to discharge, showing that control
is exercised. Limitation of the right to discharge under a collective
bargaining agreement does not detract from the existence of an employer-employee
an independent contractor cannot be fired so long as results
produced measure up to contract specifications.
- an employee has the right to end the employment relationship
at any time 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.