Using IRS 20 Factor Test to Assist in Employment Disputes

The question of whether a business’s workers are employees or independent contractors is a common issue for Wake County small businesses.  A worker’s employment status creates numerous potential litigation exposures including tax liability for employee withholding wages as well as civil suits under the Fair Labor Standards Act and/or the North Carolina Wage and Hour Act. The IRS has it’s own measure for employers to determine if an employee is eligible for independent contractor status, called the 20 Factor Test. Maginnis Howard has experiencing defending wage claims on behalf of employers as well as pursuing overtime payments or other benefits for employees who have been improperly classified as independent contractors.  Contact the firm at 919.526.0450 for more information or submit a new case inquiry here.

The IRS has developed a 20 Factor Test for employers to review in classifying their workers as employees or independent contractors.  Although these factors are not binding on North Carolina courts, the types of factors identified by the IRS are governed by the same primary principle used in FLSA and Wage and Hour cases: Whether the employer has the right to control over how, when, where, and by whom the work is performed.  These IRS factors include:

  • Does the company instruct how the worker’s task is to be accomplished and by whom?
  • How much training by the company does the worker have?  If the company trains a worker on how they expect a task to be accomplished, they are controlling the method of the worker’s performance.
  • Degree of business integration: Workers whose tasks significantly affect business success are more likely to be employees.
  • Extent of personal services: if the business insists on a particular person completing a task, they are controlling by “who” the work is performed.
  • Who has control over who the worker’s assistants or subordinates are?
  • Continuity of relationship: the IRS has indicated that a continuous relationship is reflective of a possible employment relationship when contrasted with a worker who may perform multiple, separate projects.
  • Flexibility of schedule: if the worker has certain hours for which the task must be performed, it is reflective of the company controlling how the work must be performed.
  • Is the worker required to work on a full-time basis?
  • Is the worker required to work onsite?
  • Is there a particular sequence of tasks that the worker is supposed to perform in order?
  • Does the worker have to submit written or oral progress reports?
  • How is the worker paid? Is it based on time (bi-weekly, twice a month etc.)? Or is it based on progress?
  • Who pays the worker’s business or travel expenses:
  • Who provides the tools and materials for the worker?
  • Who provides the facilities for the worker?
  • Realization of profit or loss for the contractor: Workers whose earnings are predetermined, such as with a salary, and who cannot control whether they profit or lose from the job are more likely to be employees.
  • Does the worker work in an exclusive capacity or can he work for other businesses?
  • Does the worker provide these same services to the general public?
  • Does the company have the ability to unilaterally discharge the worker.
  • Ability for the worker to freely terminate the contract: If a worker can freely quit without any obligation under the terms of an agreement, they are more likely to be an employee.

None of these factors is dispositive, even for IRS purposes.  They are certainly not dispositive for the purposes of North Carolina employment litigation matters. However, these factors can be helpful for employers in taking steps to establish their workers as independent contractors.  Additionally, companies should be aware that to the extent that their independent contractors have factors which could tend to show an employment relationship, there is an added risk of exposure to civil liability such as under the Fair Labor Standards Act and the North Carolina Wage and Hour Act.

If you are a company facing employment litigation or an employee who has not been paid wages due and owing, contact the business litigation firm of Maginnis Law, PLLC at 919.526.0450 or submit a confidential case inquiry here.  Maginnis Law is a Raleigh civil litigation firm with attorneys handling business and employment matters in Cary, Apex, Holly Springs, Morrisville and the rest of Wake, Durham and Chatham Counties.  Contact the firm today for a consultation about your civil business matters.