Behavioral Control – IRS Recent Update Includes Four Factors
One of the most confusing areas for most companies is how to treat individuals and companies they hire for projects. Company owners and CFOs are sometimes left scratching their heads at making these determinations. One of the most important aspects of determination is behavioral control.
Last week, when I was writing an article on the updated independent contractor definition I noticed that the Service had updated many of its web pages on this topic.
As the IRS commented – There is no “magic solution” to making this determination. Workers Comp premium auditors must make these determinations even though a certificate of insurance has been provided by the insured.
As I have said for the last 15 years, the IRS rules and regulations are more a rule-of-thumb method. Each state may have its own determination and workers’ compensation rules of how to assign an employee or independent contractor designation to their worker or a contracted company.
As an attorney discussed with me at a recent conference, the contract rules the determination.
Common-Law Rules For Independent Contractor Designation
Facts that provide evidence of the degree of control and independence fall into three categories:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee-type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Behavioral control refers to facts that show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work.
The behavioral control factors fall into the categories of:
- Type of instructions given
- Degree of instruction
- Evaluation systems
- Training
Types of Instructions Given
An employee is generally subject to the business’s instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work.
- When and where to do the work.
- What tools or equipment to use.
- What workers to hire or to assist with the work.
- Where to purchase supplies and services.
- What work must be performed by a specified individual?
- What order or sequence to follow when performing the work.
Behavioral Control Degree of Instruction Where Less is More
Degree of Instruction means that the more detailed the instructions, the more control the business exercises over the worker. More detailed instructions indicate that the worker is an employee. Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.
Note: The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right.
Evaluation System
If an evaluation system measures the details of how the work is performed, then these factors would point to an employee.
If the evaluation system measures just the end result, then this can point to either an independent contractor or an employee.
Training
If the business provides the worker with training on how to do the job, this indicates that the business wants the job done in a particular way. This is strong evidence that the worker is an employee. Periodic or ongoing training about procedures and methods is even stronger evidence of an employer-employee relationship. However, independent contractors ordinarily use their own methods.
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