The Employer-Employee Relationship

Front 1

What is the common law test?

Back 1

A test used to determine employee status (employee vs. independent contractor) by determining right to control. Key control factors include: behavioral control (taking into account level of instruction given and level of training provided) and financial control (Are there unreimbursed expenses, does the worker have substantial investment, how is the worker paid and does the worker realize profit or loss?)

Front 2

What is the reasonable basis test?

Back 2

§530 of the Revenue Act of 1978, consisting of: Court publications, IRS rulings, IRS technical advice sent to employer or private ruling. Also includes past IRS audits that result in findings of taxes owed or penalties, or a longstanding, recognized practice in a significant segment of the employer’s industry

Front 3

What is a statutory employee?

Back 3

Workers who are treated as employees for certain employment tax purposes. Payments made are not subject to federal income tax withholding, but are subject to withholding for social security and Medicare taxes. The employer is liable for their share of social security, Medicare and in some instances, FUTA.

Front 4

What are the four categories of statutory employees?

Back 4

Agent-drivers or commission-drivers (engaged in distributing meat, vegetables, fruits, baked goods, beverages (excluding milk), or laundry or dry cleaning services), Full-time life insurance salespersons (principal business activities include selling life insurance and/or annuity contracts, primarily for one company. FUTA exempt only if all earnings are commission), Homeworkers (worker is away from employer’s premises, with goods or material that must be returned to the employer. Homeworkers who are not employees under the common law test are not subject to FUTA), and Traveling or City salespersons (working full-time soliciting orders from wholesalers, retailers, contractors, operators of hotels, restaurants or similar establishments).

Front 5

Who are statutory non-employees?

Back 5

Qualified real estate agents (licensed real estate agents performing services in connection to the sale of a property) and Direct sellers (individuals selling products on a buy-sell or deposit-commission basis). Most compensation must be directly related to sales or other work output (not hours worked) and must be performed under written contract providing that the individual will not be treated as an employee for federal income, social security Medicare or FUTA tax purposes.

Front 6

What is the difference between a leased employee and temporary help agency employees?

Back 6

Temporary help agency employees are hired on a temporary basis, for a set contract period. They are hired, screened and trained by the temporary agency. Only the agency has the power to hire and fire the employee. A leased employee is a more permanent based employee, where the leasing company hires, trains and qualifies the worker for the position. The client company has right to hire and fire in a leased employee instance. The employer has more control, but the more control they retain, the greater the likelihood that the employee is considered an employee of their company.

Front 7

What factors do the courts and DOL consider when making employment status determinations?

Back 7

Factors include: how much control the employer has over work performed, whether the worker has the chance to make a profit or risks incurring a loss based on how skillfully work is performed, whether the worker invests in tools or materials, whether the work requires a special skill, how permanent the working relationship is, and whether the work performed is an integral part of the employer’s business.

Front 8

What is the ABC test?

Back 8

A test used by more than half of the states to determine employee status for reasons of unemployment insurance: A worker is an independent contractor only providing there is an Absence of control, Business is unusual and/or away, and Customarily an independent contractor.

Front 9

What are the penalties for misclassifying a worker?

Back 9

For not withholding FIT: tax assessed is 1.5% of wages paid, doubled to 3% if no information returns were filed (Form 1099-MISC). For not withholding EE share of social security and Medicare: 20% of the employee’s share, doubled to 40% if no information returns were filed (Form 1099-MISC)