Employee or Independent Contractor?
Employers often utilize independent contractors as a way to save money and avoid the payment of employment taxes. As an employer, it is critical to correctly determine whether individuals rendering services are employees or independent contractors. Failing to properly classify workers may result in additional premiums, penalty and interest charges.
Employers Who are Liable to Pay Unemployment Taxes Include the Following:
- An employing unit that is liable under the Federal Unemployment Tax Act (FUTA) and has at least one employee in Tennessee regardless of the number of weeks employed or amount of payroll.
- An employing unit that pays $1,500 or more in total gross wages in a calendar quarter, or has at least one employee during twenty different weeks in the current or preceding calendar year regardless of the wages. The employee does not have to be the same person for twenty weeks. It is not relevant if the employee is full-time or part-time.
- An employer who has acquired all or part of the business of another employer who was already liable.
- An employing unit that is a non-profit organization as described under section 501(c)(3) of the IRS code and has four or more employees during each of 20 weeks in the current or preceding calendar year.
- All state and local government units and political subdivisions.
- An employing unit that paid cash wages of $1,000 or more in any calendar quarter of the current or preceding calendar year for domestic services.
- Any agricultural employer who pays $20,000 or more in wages in any calendar quarter or employs 10 or more workers for some part of a day in each of 20 weeks in the current or preceding calendar year.
Independent Contractor or Employee?
In 2019, the Tennessee Legislature passed HB 539 which requires the consideration of the 20-factor test in IRS Revenue Ruling 87-41 to determine whether an employer-employee relationship exists for purposes of Tennessee’s wage and hour laws, the Occupational Safety and Health Act of 1972, and Tennessee Employment Security law. This law became effective on January 1, 2020. Prior to January 1, 2020, the Tennessee Employment Security law relied on the ABC test to determine a worker’s status as an employee or independent contractor.
For services performed BEFORE January 1, 2020, the law in effect is the “ABC” test.
Service performed by an individual shall be deemed to be included service for purposes of this section regardless of whether the common-law relationship of master and servant exists, unless and until it is shown to the satisfaction of the administrator that:
(A) The individual has been and will continue to be free from control and direction in connection with the performance of the service, both under any contract for the performance of service and in fact;
(B) The service is performed either outside the usual course of the business for which the service is performed or is performed outside of all the places of business of the enterprise for which the service is performed; and
(C) The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed;
For services performed ON or AFTER January 1, 2020, the law in effect is the 20 factors.
It is important to note that not all factors are weighted equally or may be relevant to the determination. The department will examine the factors that apply to the relationship in making its determination.
(1) Instructions. A worker who is required to comply with other persons' instructions about when, where, and how the worker is to work is ordinarily an employee. This control factor is present if the person or persons for whom the services are performed have the right to require compliance with instructions;
(2) Training. Training a worker by requiring an experienced employee to work with the worker, by corresponding with the worker, by requiring the worker to attend meetings, or by using other methods indicates that the person or persons for whom the services are performed want the services performed in a particular method or manner;
(3) Integration. Integration of the worker's services into the business operations generally shows that the worker is subject to direction and control. When the success or continuation of a business depends to an appreciable degree upon the performance of certain services, the workers who perform those services must necessarily be subject to a certain amount of control by the owner of the business;
(4) Services rendered personally. If the services must be rendered personally, then presumably the persons for whom the services are performed are interested in the methods used to accomplish the work as well as in the results;
(5) Hiring, supervising, and paying assistants. If the person or persons for whom the services are performed hire, supervise, and pay assistants, then that factor generally shows control over the workers on the job. However, if one (1) worker hires, supervises, and pays the other assistants pursuant to a contract under which the worker agrees to provide materials and labor and under which the worker is responsible only for the attainment of a result, then this factor indicates an independent contractor status;
(6) Continuing relationship. A continuing relationship between the worker and the person or persons for whom the services are performed indicates that an employer-employee relationship exists. A continuing relationship may exist where work is performed at frequently recurring although irregular intervals;
(7) Set hours of work. The establishment of set hours of work by the person or persons for whom the services are performed is a factor indicating control;
(8) Full time required. If the worker must devote substantially full time to the business of the person or persons for whom the services are performed, then the person or persons have control over the amount of time the worker spends working and impliedly restrict the worker from doing other gainful work. An independent contractor is free to work when and for whom the independent contractor chooses;
(9) Doing work on employer's premises. If the work is performed on the premises of the person or persons for whom the services are performed, then that factor suggests control over the worker, especially if the work could be done elsewhere. Work done off the premises of the person or persons receiving the services, such as at the office of the worker, indicates some freedom from control. However, this fact by itself does not mean that the worker is not an employee. The importance of this factor depends on the nature of the service involved and the extent to which an employer generally would require that employees perform those services on the employer's premises. Control over the place of work is indicated when the person or persons for whom the services are performed have the right to compel the worker to travel a designated route, to canvass territory within a certain time, or to work at specific places as required;
(10) Order or sequence set. If a worker must perform services in the order or sequence set by the person or persons for whom the services are performed, then that factor shows that the worker is not free to follow the worker's own pattern of work but instead must follow the established routines and schedules of the person or persons for whom the services are performed. Often, because of the nature of an occupation, the person or persons for whom the services are performed do not set the order of the services or set the order infrequently. It is sufficient to show control, however, if the person or persons retain the right to do so;
(11) Oral or written reports. A requirement that the worker submit regular or written reports to the person or persons for whom the services are performed indicates a degree of control;
(12) Payment by hour, week, month. Payment by the hour, week, or month generally points to an employer-employee relationship; provided, that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment made by the job or on straight commission generally indicates the worker is an independent contractor;
(13) Payment of business or traveling expenses. If the person or persons for whom the services are performed ordinarily pay the worker's business or traveling expenses, then 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;
(14) Furnishing of tools and materials. The fact that the person or persons for whom the services are performed furnish significant tools, materials, and other equipment tends to show the existence of an employer-employee relationship;
(15) Significant investment. If the worker invests in facilities that are used by the worker in performing services and are not typically maintained by employees, such as the maintenance of an office rented at fair value from an unrelated party, then that factor tends to indicate that the worker is an independent contractor. However, lack of investment in facilities indicates dependence on the person or persons for whom the services are performed for the facilities and the existence of an employer-employee relationship;
(16) Realization of profit or loss. A worker who can realize a profit or suffer a loss as a result of the worker's services, in addition to the profit or loss ordinarily realized by employees, is generally an independent contractor but the worker who cannot is an employee. For example, if the worker is subject to a real risk of economic loss due to significant investments or a bona fide liability for expenses, such as salary payments to unrelated employees, then that factor indicates that the worker is an independent contractor. The risk that a worker will not receive payment for the worker's services is common to both independent contractors and employees and does not constitute sufficient economic risk to support treatment as an independent contractor;
(17) Working for more than one firm at a time. If a worker performs more than de minimis services for multiple unrelated persons or firms at the same time, then that factor generally indicates that the worker is an independent contractor. However, a worker who performs services for more than one (1) person may be an employee of each of the persons, especially where such persons are part of the same service arrangement;
(18) Making service available to the general public. The fact that a worker makes the worker's services available to the general public on a regular and consistent basis indicates an independent contractor relationship;
(19) Right to discharge. The right to discharge a worker is a factor indicating that the worker is an employee and the person possessing the right is an employer. An employer exercises control through the threat of dismissal, which causes the worker to obey the employer's instructions. An independent contractor cannot be fired so long as the independent contractor produces a result that meets the contract specifications; and
(20) Right to terminate. If the worker has the right to end the worker's relationship with the person for whom the services are performed at any time the worker wishes without incurring liability, then that factor indicates an employer-employee relationship.
If you have questions about the classification of workers, you may contact the Tennessee Department of Labor and Workforce Development to speak with a tax auditor.
Report Suspected Unemployment Insurance Tax Fraud:
- Call 615-741-2346