Independent Contractor or Employee? – Behavioral Control

This is the third post in the Independent Contractor/Employee series. This series is dedicated to presenting individuals, sole proprietorships, and small to large businesses with a basic understanding of independent contractor issues.

Revenue Ruling 87-41 states the factors the IRS considers when whether a worker is an independent contractor or employee. These factors are divided into three groups: behavioral control, financial control, and relationship of the parties. This article focuses on the behavioral control factors.

The behavioral control factors are related to the right to direct and control the worker in performing the services, including instructions on:

  • How to do the work;
  • When to do the work;
  • Where to do the work;
  • What tools or equipment to use;
  • What employees to hire to assist with the work;
  • Where to purchase supplies and services; and,
  • How to receive compensation.

1. Degree of instruction. Less extensive instructions concerning what should be done but not how it should be done are often consistent with independent contractor status.

2. Suggestions vs. instructions. If compliance with the suggestions is mandatory, or if the worker would suffer adverse consequences for non-compliance, such as termination or failure to receive more work, then the suggestions are, in fact, instructions.

3. Prior approval. The need to obtain prior approval to complete work is an example of instruction and favors classifying the worker as an employee.

4. Client or third party instructions. The customer or third party tells the business that engages the worker how work is to be done. Instructions and standards will not be disregarded merely because they originated with the customer.

5. Business identification. If the nature of the worker’s occupation is such that the worker must be identified with the business for security purposes, wearing a uniform or placing the business’ name on a vehicle does not, by itself, establish an employment relationship.

6. Nature of work. Control requires only such supervision as the nature of the work requires. A minimal amount of direction and control is needed for a stock person, store clerk, and gas station attendant. Highly trained professionals such as doctors, accountants, lawyers, engineers, computer specialists, etc., require very little, if any, training and/or instruction on how to perform their services. The absence of need to control should not be confused with the absence of right to control.

7. Evaluation systems. Whether a business evaluates a worker’s performance and what purpose the evaluations serve.

8. Training. Periodic or on-going training provided by a business about procedures to be followed and methods to be used indicates that the business wants the services performed in a particular manner. This type of training is strong evidence of an employment relationship. A company may provide a short orientation or information session about the company’s policies, new product line, or new government regulations. None of these indicates a right to direct and control the performance of the worker.