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Using IRS 20 Factor Test to Assist in Employment Disputes

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The question of whether a business’s workers are employees or independent contractors is a common issue for small businesses.  A worker’s employment status creates numerous potential litigation exposures including tax liability for employee withholding wages as well as civil suits under the Fair Labor Standards Act and/or the North Carolina Wage and Hour Act. Therefore, the IRS created the 20 factor test to determine a worker is an employee or an independent contractor.

The 20 Factor Test

The IRS has developed a 20 Factor Test for employers to classify their workers as employees or independent contractors.  Although these factors are not binding in North Carolina courts, the conditions remain subject to various labor laws. Essentially, the test examines whether the employer has the right to control who performs the work in addition to how, when, and where.  These IRS factors include:

  1. Does the company instruct the who and how of accomplishing a task?
  2. How much training by the company does the worker have?  If the company trains a worker on how they expect a task to be accomplished, they are controlling the method of the worker’s performance.
  3. Degree of business integration: Workers whose tasks significantly affect business success are more likely to be employees.
  4. Extent of personal services: if the business insists on a particular person completing a task, they are controlling by whom the work is performed.
  5. Who has control over who the worker’s assistants or subordinates are?
  6. Continuity of relationship: the IRS has indicated that a continuous relationship is reflective of a possible employment relationship when contrasted with a worker who may perform multiple, separate projects.
  7. Flexibility of schedule: This applies to workers who have a set period of time in which they must accomplish a task. This falls under the category of controlling the “how”.
  8. Does the employee work full-time?
  9. Is the worker required to work onsite?
  10. Does the employee have to follow a particular sequence of tasks in a certain orde?
  11. Does the worker have to submit written or oral progress reports?
  12. Worker pay schedule: Is it based on time (bi-weekly, twice a month etc.)? Or is it based on progress?
  13. Who pays the worker’s business or travel expenses:
  14. Who provides the tools and materials for the worker?
  15. Who provides the facilities for the worker?
  16. Realization of profit or loss for the contractor: Workers whose earnings are predetermined, such as with a salary, and who cannot control whether they profit or lose from the job are more likely to be employees.
  17. Does the worker work in an exclusive capacity or can he work for other businesses?
  18. Does the worker provide these same services to the general public?
  19. Does the company have the ability to unilaterally discharge the worker.
  20. Ability for the worker to freely terminate the contract: If a worker can freely quit without any obligation under the terms of an agreement, they are more likely to be an employee.

Applying the 20 Factor Test

None of these factors, however, is dispositive, even for IRS purposes.  They are certainly not dispositive for the purposes of North Carolina employment litigation matters. However, these factors can be helpful for employers in taking steps to establish their workers as independent contractors.  Additionally, companies should be aware that to the extent that their independent contractors have factors which could tend to show an employment relationship, there is an added risk of exposure to civil liability such as under the Fair Labor Standards Act and the North Carolina Wage and Hour Act.

Representation for Employer/Employee Disputes

If you are a company facing employment litigation or an employee denied rightful earnings, contact us today. Maginnis Howard is a Raleigh civil litigation firm with attorneys handling business and employment matters across North Carolina. Call us at (919) 526-0450 or send a confidential message through our contact page.