Independent Contractors Determining Classification: Categories of Evidence

        Employee or Independent Contractor?


Since common law factors change, the courts and the IRS have grouped the preceding questions into three main categories, known as the “categories of evidence.” These categories are behavioral control, financial control and type of relationship.

Behavioral control Individuals should be classified as employees if the employer assumes control over their instruction and training:

     • Instruction – an employee is generally told:

               o When, where and how to work

               o What tools or equipment to use

               o What workers to hire or to assist with the work

               o Where to purchase supplies and services

               o What work must be performed by each individual

               o What order or sequence to follow

     • Training – an employee may be trained to perform services in a
     particular manner.

Financial control The extent to which the individual carries the following financial burdens or privileges can dictate whether he or she is an employee or an independent contractor:

     • Cost of work expenses and reimbursements

     • Contributions and significant company investments

     • Offering services to the general public

     • Manner of compensation and payment

     • The possibility for making a profit or sustaining a loss after the
     work is complete

Type of relationship The following can also be used to classify an individual:

     • Written contracts describing the intended relationship

     • Whether the worker receives employee benefits

     • The permanency or length of the relationship

     • How integral the services are to the company’s principal activity

Hiring an independent contractor offers employers many advantages. Unlike for traditional employees, employers do not pay taxes on independent contractors’ wages, and are not expected to provide benefits. Employers often save 30 to 40 percent on labor costs by using independent contractors. In addition, as independent contractors are generally hired for a specific period or project, employers have no obligation to rehire them after each contract period or project is complete.