Employee vs. Independent Contractor

Given the advantages of using contract services, many employers may be tempted to reclassify an existing employee as an “independent contractor” or retain a person as a “contractor” in order to avoid the expense and burdens associated with employment, labor, pension and related tax laws. Whether or not a worker your city has retained as a “contractor” is, in reality, an “employee” depends on several factors.  

The main test for determining if a worker is an employee or an independent contractor has been established by the Internal Revenue Service (IRS).The IRS uses a test that has been boiled down to three main categories: behavioral control, financial control and the type of relationship. This test is also what determines applicability of coverage under the Iowa Public Employees Retirement System (IPERS). In each case, it is very important to consider all the facts – generally no single fact provides the complete answer. 

Behavioral Control factors indicate a right to direct or control how the worker does the work. Instructions and training are two examples of behavioral control. “Instruction” includes, but is not limited to, telling the person how, when or where to do the work, what tools or equipment to use, what assistants to hire to help with the work and where to purchase supplies or services. Training as it relates to required procedures and methods indicate that the business wants the work done in a certain way. 

Financial Control factors also indicate control over the business part of work. There is no precise dollar test, but a significant personal investment in a product or tools used to perform the work tends to indicate the work is being performed by an independent contractor. Expenses not reimbursed for some or all business expenses as well as the opportunity for profit or loss also suggests an independent contractor relationship.

Relationship factors illustrate how the business and the worker perceive their relationship. Employee benefits received, such as insurance, pension or paid leave indicates an employee relationship. Written contracts stating what both parties intend as a relationship of the employment may be significant if it is difficult to determine status as either independent contractor or employee. Another factor may be if the work performed by the worker is a key element of the organization’s regular business. 

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