Let’s start with some basics. Although there are many tests for determining whether a worker is an employee, the most common types of tests are Right to Control Tests.
These tests seek to determine who has the right to control the means and manner by which work is performed. If the company has more control, the worker is generally an employee. If the worker has more control, the worker is more likely an independent contractor. That’s an overstatement, but it captures the gist of the issue.
Right to Control Tests are balancing tests. Many factors are considered, with no one factor determinative. Courts (or agencies) then determine based on the totality of circumstances, whether the relationship more closely resembles employment or an independent contractor arrangement.
The specific factors vary from test to test, from law to law.
ERISA and the federal anti-discrimination statutes (Title VII, Age Discrimination in Employment Act, Americans with Disabilities Act) generally apply a common law version of the Right to Control Test, as articulated by the U.S. Supreme Court in 1992 in Nationwide Mutual Ins. Co. v. Darden, 503 U.S. 318, 323 (1992).
Darden was an ERISA dispute that arose because of (understandable) confusion over the definition of “employee.” ERISA defines “employee” as “any individual employed by an employer.” Real helpful, right?
Faced with this circular definition, the Supreme Court looked to old-timey agency law on master-servant relationships. The common law agency test traditionally focused on the hiring party’s right to control the manner and means by which the work is accomplished.
Brief Historical Aside for Those Who Might Care: Common law agency doctrine was created by judges to determine when a master should be held liable for torts committed by a servant. The doctrine emphasized the degree of control the master had over the manner and means of the servant’s work. The theory is based on the principle that a person with little control over the actions of others should not be liable for those actions.
The Supreme Court provided a non-exhaustive list of the types of factors that should be considered when making this determination. The factors include:
- The skills required
- Unskilled work generally requires more control and is more likely employment; contractors tend to be trained and have a particular skill to offer
- The source of the instrumentalities and tools
- If hiring party provides the tools, it is more likely employment; contractors are expected to use their own supplies
- The location of the work
- Work that must be performed at the hiring party’s location is more likely employment; contractors are generally free to work wherever and whenever they please.
- The duration of the relationship between the parties
- When work is indefinite or a worker is moved from one project to the next, that suggests employment; contractors are more commonly hired for a single project
- Whether the hiring party has the right to assign additional projects to the hired party
- If the hiring party has the right to assign additional projects, that is a strong indicator of control and, and the relationship tends to resemble employment.
- The extent of the hired party’s discretion over when and how long to work
- Contractors can generally work on the days and at the times of their choosing; the hiring party is concerned that the work is completed by a deadline, but is not concerned with exactly when the work is performed.
- The method of payment
- Employees tend to be paid by the hour; contractors are more commonly paid by the day or by the project.
Other versions of the Right to Control analysis have emerged as well. The Internal Revenue Service articulated a 20-factor Right to Control Test in 1987, in Revenue Ruling 87-41:
1. Instructions. Workers who are required to comply with others’ instructions about when, where, and how they are to work are generally deemed employees.
2. Training. When the hiring party trains the worker on how to perform the job, that suggests the hiring party is exercising control over how the work is done.
3. Integration. When the success or continuation of a business depends on the performance of certain services, the workers performing those services are generally subject to control by the owners of the business, making it more likely they are employees.
4. Services rendered personally. If the hiring party requires that the worker perform the work personally, the hiring party is controlling how the work is performed and the worker is more likely an employee. If the worker can hire helpers, the worker is more likely a contractor.
5. Hiring, supervising, and paying assistants. If the hiring party controls these processes, the workers are more likely employees. Contractors tend to work without supervision.
6. Continuing relationships. Employees tend to work indefinitely and on multiple projects. Contractors are more likely retained for an individual project.
7. Set hours of work. When the hiring party requires that work be performed during certain hours on certain days, that exercise of control suggests employment.
8. Full-time required. If workers must devote their full time and attention to the hiring party’s business, the worker is likely an employee. Contractors generally work for themselves and have the discretion to divide their attention as they please.
9. Doing work on employers’ premises. When work must be performed on the hiring party’s premises, control is being exercised and the work is more likely employment.
10. Order or sequences set. When the hiring party dictates the order or sequence in which the work is performed, control is being exercised and the relationship is more likely employment. Contractors tend to decide how and in what sequence to perform the tasks, with the hiring party caring only about the result, not how it is achieved.
11. Oral or written reports. If workers are required to submit regular progress reports, they are more likely employees.
12. Payment by hour, week, or month. Employees tend to get paid by the hour or based on how long the work takes. A contractor is more likely paid by the project, regardless of how long the project takes.
13. Payment of business and/or traveling expense. Payment of expenses suggests an employment relationship. Contractors, on the other hand, tend to price expenses into their quote and more likely pay their won expenses.
14. Furnishing tools and materials. When the hiring party provides the tools, materials, and other equipment needed to perform the work, the work is more likely employment.
15. Significant investments. Workers are more likely independent contractors if they invest in facilities that are not typically maintained by employees (such as an office rented at fair market value from an unrelated party). Employees depend on employers for such facilities.
16. Realization of profits or losses. Workers who can realize profits or losses depending on how they price their work are more likely independent contractors. Employees are generally paid for all time they work and are reimbursed for expenses, thereby making it harder to incur a loss.
17. Working for more than one firm at a time. Workers who perform similar services for a number of unrelated businesses at the same time are probably in business for themselves and therefore tend to be independent contractors.
18. Making services available to the general public. Independent contractors make their services available to the general public. Employees work for their employer.
19. Right to discharge. If the hiring party can discharge the worker at will, the worker is more likely an employee. Contractors are more often protected based on a contractual agreement that they are being retained to complete a project.
20. Right to terminate. Workers who can quit at any time without incurring liability are generally employees. Contractors are retained for a project and may incur liability if they fail to complete the contracted work.
The IRS later reformulated this 20-factor test, however, condensing these concepts into three broader categories of factors: behavioral control, financial control, and type of relationship. More detail on the current IRS test can be found here.
Various states have created their own Right to Control Tests, some applying the Darden factors, some applying the original IRS 20 factors, some applying the revised IRS factors, and some creating their own versions.
In general, however, the Right to Control Tests are multi-factor balancing tests that attempt to determine whether the hiring party has the right to control the means and manner by which the work is accomplished. Notably, it is the right to control which matters most, even if that control is not actually exercised.