Sales people can be independent contractors - or they can be employees. And figuring out which is which for any company is difficult. Most businesses prefer to have sales people considered as independent contractors, because no FICA taxes are required of the company for these workers. But the company must be careful in how it treats workers, to be sure the workers are really independent.
A recent District Court case in Iowa illustrates the difficulty of making the "independent contractor vs. employee" decision, because there are factors which could take the decision either way. A court must consider all the factors and use its best judgment to come up with a decision. Remember, the IRS considers workers to be employees unless there is compelling reason to consider them as independent contractors.
Factors in Determining Status - 20 Factor Test
The case in question was heard by the U.S. District Court for Iowa and South Dakota, relating to Porter Livestock (August 2008). The Court used the IRS "20 Factor Test" in its discussion of the case. The 20 Factors (explanation from the U.S. Chamber of Commerce) are:
- Instructions. Workers who must comply with your instructions as to when, where, and how they work are more likely to be employees than independent contractors.
- Training. The more training your workers receive from you, the more likely it is that they're employees. The underlying concept here is that independent contractors are supposed to know how to do their work and, thus, shouldn't require training from the purchasers of their services.
- Integration. The more important that your workers' services are to your business's success or continuation, the more likely it is that they're employees.
- Services rendered personally. Workers who must personally perform the services for which you're paying are more likely employees. In contrast, independent contractors usually have the right to substitute other people's services for their own in fulfilling their contracts.
- Hiring assistants. Workers who are not in charge of hiring, supervising, and paying their own assistants are more likely employees.
- Continuing relationship. Workers who perform work for you for significant periods of time or at recurring intervals are more likely employees.
- Set hours of work. Workers for whom you establish set hours of work are more likely employees. In contrast, independent contractors generally can set their own work hours.
- Full time required. Workers whom you require to work or be available full time are likely to be employees. In contrast, independent contractors generally can work whenever and for whomever they choose.
- Work done on premises. Workers who work at your premises or at a place you designate are more likely employees. In contrast, independent contractors usually have their own place of business where they can do their work for you.
- Order or sequence set. Workers for whom you set the order or sequence in which they perform their services are more likely employees.
- Reports. Workers whom you require to submit regular reports are more likely employees.
- Payment method. Workers whom you pay by the hour, week, or month are more likely employees. In contrast, independent contractors are usually paid by the job.
- Expenses. Workers whose business and travel expenses you pay are more likely employees. In contrast, independent contractors are usually expected to cover their own overhead expenses.
- Tools and materials. Workers whose tools, materials, and other equipment you furnish are more likely employees.
- Investment. The greater your workers' investment in the facilities and equipment they use in performing their services, the more likely it is that they're independent contractors.
- Profit or loss. The greater the risk that your workers can either make a profit or suffer a loss in rendering their services, the more likely it is that they're independent contractors.
- Works for more than one person at a time. The more businesses for which your workers perform services at the same time, the more likely it is that they're independent contractors.
- Services available to general public. Workers who hold their services out to the general public (for example, through business cards, advertisements, and other promotional items) are more likely independent contractors.
- Right to fire. Workers whom you can fire at any time are more likely employees. In contrast, your right to terminate an independent contractor is generally limited by specific contractual terms.
- Right to quit. Workers who can quit at any time without incurring any liability to you are more likely employees. In contrast, independent contractors generally can't walk away in the middle of a project without running the risk of being held financially accountable for their failure to complete the project.
Factors Applied to the Porter Case
In the Porter case, look at the specific findings of the Court:
- The salesmen (all men in this case) had no set territory,no set hours of work, and no one else had control over when they worked. All three of these factors indicate an independent contractor situation.
- All of the salesmen had training, which consisted of "riding along," providing advice, or seminars, but much of the training had to do with the specifics of the products being sold, rather than details of how to sell. The Court decided that this factor was only "minimally" decisive.
- There was no requirement that the salesmen submit written reports, although some submitted these reports voluntarily.
- The salesmen were paid by commission, but they could take a draw against next week's commission; commission indicates independent contractor status, but the draw indicated salary, and employee status. This factor was not considered in the evaluation.
- Expenses were paid by the company and the salesmen were provided a vehicle to use to make sales calls and deliver products. Both of these factors indicate an employment relationship.
- The salesmen did not invest in facilities to use in performing duties; they were reimbursed for these expenses. Lack of investment in facilities and reimbursement both indicate employer-employee relationship.
- Two of the salesmen reported working for other companies - too few to be considered a factor in the decision.
- Either the salesman or the company could terminate the relationship at any time - this indicates an employment situation.
- Finally, the salesmen said they were not provided with health benefits or other employee benefits.
So, what was the Court's finding?
a consideration of the relevant factors supports the IRS's finding that the salesmen were not properly classified as independent contractors, and, instead, an employer-employee relationship existed.
Even though a number of factors indicated independent contractor relationship, the Court didn't find the independent contractor items compelling enough to change the status of these salesmen from employee to independent contractor.
Tomorrow, an additional "wrinkle" in this case you should know about
The direct link to the Porter case above is: http://www.iasd.uscourts.gov/iasd/opinions.nsf/.../$FILE/Porter.pdf