This document describes the 20 common law tests applied by the IRS. This
is an excerpt from hearings before the Committee on Ways and Means,
Independent Contractors, June 20, July 16 and 17, 1979, Serial 96-32.
IRS AND BUSINESS TAXPAYERS DISAGREE OVER
WHO SHOULD BE CONSIDERED EMPLOYEES:
WHY; RESULTS; SOLUTIONS
IRS and business taxpayers frequently disagree over whether various
business relationships with individuals are that of employer-employee under
the common law definitions. IRS interpretation of a common law employee is
more strict--more likely to result in a finding of employee status--than
that of business and, in many instances, the courts. This is particularly
troublesome because IRS relies on business taxpayers to make the initial
employment status determinations which may later be subjected to IRS audit.
The term "common law" is not defined in the statutes. It is a body of
law and legal theory based on customs and usages that originated and
developed in England. The common law definition of employee is based on a
master-servant relationship where the master directs and controls the work
performed by the servant.
Under the common law, a worker is an employee if the person for whom
he works has the right to direct and control the way he works, both as to
the final result and as to the details of when, where, and how the work is
to be done. It is the IRS view that the employer need not actually
exercise control. it is sufficient that he has the right to do so.
IRS has adopted 20 rules (see App. I) to determine whether workers are
employees. In brief, these rules are directed at the following questions.
1. Is the person providing services required to comply with instructions
about when, where, and how the work is to be done?
2. Is the person provided training to enable him to perform a job in a
particular method or manner?
3. Are the services provided integrated into the business' operation?
4. Must the services be rendered personally?
5. Does the business hire, supervise, or pay assistants to help the
person performing services under contract?
6. Is the relationship between the individual and the person he performs
services for a continuing relationship?
7. Who sets the hours of work?
8. Is the worker required to devote his full time to the person he
performs services for?
9. Is the work performed at the place of the business of the potential
10. Who directs the order or sequence in which the work must be done?
11. Are regular oral or written reports required?
12. What is the method of payment--hour, week, commission, or by the
13. Are business and/or traveling expenses reimbursed?
14. Who furnishes tools and materials used in providing services?
15. Does the person providing services have a significant investment in
facilities used to perform services?
17. Can the person providing services realize both a profit or a loss?
18. Can the person providing service work for a number of firms at the
19. Does the person make his services available to the general public?
20. Is the person providing services subject to dismissal for reasons
other than nonperformance of contract specifications?
Can the person providing services terminate his relationship
without incurring a liability for failure to complete a job?
--- skipping to Appendix I ---
The Common Law Rules--Factors
1. Instructions. A person who is required to comply with instructions
about when, where, and how he is to work is ordinarily an employee.
Some employees may work without receiving instructions because they are
highly proficient in their line of work and can be trusted to work to
the best of their abilities; however, the control factor is present if
the employer has the right to instruct. The instructions may be oral or
may be in the form of manuals or written procedures which show how the
desired result is to be accomplished.
2. Training. Training of a person by an experienced employee working
with him, by correspondence, by required attendance at meetings and by
other methods is a factor of control because it is an indication that
the employer wants the services performed in a particular method or
manner. This is especially true if the training is given periodically
or at frequent intervals. An independent contractor ordinarily uses his
own methods and receives no training from the purchaser of his services.
3. Integration. Integration of the person's services into the business
operations generally shows that he is subject to direction and control.
In applying the integration test, first determine the scope and function
of the business and then whether the services of the individual are
merged into it. When the success or continuation of a business depends
to an appreciable degree upon the performance of certain services, the
people 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 it indicates that the employer is interested in the methods
as well as the results. He is interested not only in getting a desired
result, but also in who does the job. Lack of control may be indicated
when an individual has the right to hire a substitute without the
5. Hiring, Supervising, and Payment of Assistants. Hiring, supervising,
and payment of assistants by the employer generally shows control over
all the men on the job. Sometimes one worker may hire, supervise, and
pay the other workmen. He may do so as the result of a contract in
which he agrees to provide materials and labor and under which he is
responsible only for the attainment of a result, in which case he is an
independent contractor. On the other hand, if he does so at the
direction of the employer, he may be acting as an employee in the
capacity of foreman for or representative of the employer.
6. Continuing Relationship. The existence of a continuing relationship
between an individuals and the person for whom he performs services is a
factor tending to indicate the existence of an employer-employee
relationship. Continuing services may include work performed at
frequently recurring through somewhat irregular intervals either on call
of the employer or whenever the work is available. If the arrangement
contemplates continuing or recurring work, the relationship is
considered permanent, even if the services are rendered on a part-time
basis, they are seasonal in nature, or the person actually works only a
7. Set Hours of Work. The establishment of set hours of work by the
employer is a factor indicative of control. This condition bars the
worker from being master of his own time, which is a right of the
independent contractor. Where fixed hours are not practical because of
the nature of the occupation, a requirement that the worker work at
certain times is an element of control.
8. Full Time Required. If the worker must devote his full time to the
business of the employer, the employer has control of the amount of time
the worker spends working and impliedly restricts him from doing other
gainful work. An independent contractor, on the other hand, is free to
work where, and for whom, he chooses.
Full time does not necessarily mean an 8-hour day or a 5-day or 6-day
week. Its meaning may vary with the intent of the parties, the nature
of the occupation, and customs in the locality. These conditions
should be considered in defining "full time."
Full-time services may be required even though not specified in
writing or orally. For example, a person may be required to produce a
minimum volume of business which compels him to devote all of his
working time to that business, or he may not be permitted to work for
anyone else and to earn a living he necessarily must work full time.
9. Doing Work on Employer's Premises. Doing the work on the employer's
premises is not control in itself; however, it does imply that the
employer has control especially where the work is of such a nature that
it could be done elsewhere. A person working in the employer's place of
business is physically within the employer's directions nd supervision.
The use of desk space and of telephone and stenographic services
provided by an employer places the worker within the employer's
direction and supervision unless the worker has the option as to whether
he wants to use these facilities.
The fact that work is done off the premises does indicate some freedom
from control However, it does not by itself mean that the worker is
not an employee. In some occupations the services are necessarily
performed away from the premises of the employer. This is true, for
example, of employees of construction contractors.
10. Order or Sequence Set. If a person must perform service in the
order or sequence set for him by the employer, it shows that the worker
may be subject to control as he is not free to follow his own pattern of
work, but must follow the established routines and schedules of the
Often, because of the nature of an occupation, the employer does not
set the order of the services or sets them infrequently. It is
sufficient to show control, however, if he retains the right to do so.
11. Oral or Written Reports. If regular oral or written reports must
be submitted to the employer, it indicates control, in that the work is
compelled to account for his actions.
12. Payment by Hour, Week, Month. An employee is usually paid by the
hour, week, or month; whereas, payment on a commission or job basis is
customary where the worker is an independent contractor. Payment by the
job includes a lump sum which is computed by the number of hours
required to do the job at a fixed rate per hour; it may also include
weekly or monthly payments if this method of payment is a convenient way
of paying a lump sum agreed upon as the cost of doing a job.
The guarantee of a minimum salary or the granting of a drawing account
at stated intervals with no requirement for repayment of the excess
over earnings tends to indicate the existence of an employer-employee
13. Payment of Business and/or Traveling Expense. Payment by the
employer of the worker's business and/or traveling expenses is a factor
indicating control over the worker. Conversely, a lack of control is
indicated where the worker is paid on a job basis and has to take care
of all incidental expenses.
14. Furnishing of Tools, Materials. The furnishing of tools,
materials, etc., by the employer is indicative of control over the
worker. Where the worker furnishes the tools, materials, etc., it
indicates a lack of control but consideration must be given to the fact
that in some occupational fields it is customary for employees to use
their own hand tools.
15. Significant Investment. A significant investment by a person in
facilities used by him in performing services for another tends to show
an independent status. On the other hand, the furnishing of all
necessary facilities by the employer tends to indicate the absence of an
independent status on the part of the worker.
Facilities include, generally, equipment or premises necessary for the
work but not tools, instruments, clothing, etc., that are provided by
employees as a common practice in their particular trade.
16. Realization of Profit or Loss. A person who is in a position to
realize a profit or suffer a loss as a result of his services is
generally an independent contractor, while the individual who is an
employee is not in such a position. Opportunity for profit or loss may
be established by one or more of a variety of circumstances, e.g.:
A. The individual hires, directs, and pays assistants.
B. He has his own office, equipment, materials, or other
facilities for doing the work.
C. He has continuing and recurring liabilities or obligations
and his success or failure depends on the relation of his receipts to
D. He agrees to perform specific jobs for prices agreed upon in
advance and pays expenses incurred in connection with the work.
17. Working for More Than One Firm At a Time. If a person works for a
number of firms at the same time, it usually indicates an independent
status because in such cases the worker is usually free from control by
any of the firms. It is possible, however, that a person may work for a
number of people or firms and still be an employee of one or all of
18. Making Service Available to General Public. The fact that a person
makes his services available to the general public is usually indicative
of an independent contractual relationship. An individual may hold his
services out to the public in a number of ways. he may have his own
office and assistants, he may hang out a "shingle" in front of his home
or office, he may hold business licenses, he may be listed in business
directories, or he may advertise in newspapers, trade journals,
19. Right to Discharge. The right to discharge is an important factor
in indicating that the person possessing the right is an employer. He
exercises control through the ever-present threat of dismissal which
causes the worker to obey his instructions. An independent contractor,
on the other hand, cannot be fired as long as he produces a result which
measures up to his contract specifications.
Sometimes an employer's right to discharge is restricted because of
his contract with a labor union. Such a restriction does not detract
from the existence of an employment relationship.
2. Right to Terminate. An employee has the right to end his
relationship with his employer at any time he wishes without incurring
liability. An independent contractor usually agrees to complete a
specific job and he is responsible for its satisfactory completion or is
legally obligated to make good for failure to complete the job.