Employee or independent contractor? It’s an important question with important consequences.
The question can arise in different contexts, can be resolved with different tests, and can lead to different results. But looking at the four common tests will help you determine the right answer.
(1) The Control Test
The control test has been summarized as the difference between telling a contractor what to do, and telling an employee how to do it.
The amount of reporting to management, and the amount of control over when, where and how the work is done, are minimized in a contractor relationship.
(2) Ownership of Tools
The more “tools” the contractor owns, provides or pays for to carry out the work, the more likely he will be considered an independent contractor. In many cases the basic tools are a car, a cell phone and a computer. The contractor should be responsible for providing the tools and to pay for all acquisition and maintenance costs. Other “tools” that might be provided by or paid for by the contractor are promotional materials, office space and administrative and accounting services.
(3) Profit and Loss
The chance of profit and risk of loss refers to what is also called the “entrepreneur test” and considers whether the contractor is in business for himself.
That means, in addition to control over the work and providing the tools, having as much freedom as possible to provide services to others and to carry on other businesses.
The organization or “integration” test looks at the extent to which the contractor’s services are integral to the business. But this test has been criticized, and it is clear that not only employees can provide the integral services a business needs.
All four tests must be considered together, and it comes down to this:
An independent contractor is one who can be said to be in business for himself.