Keith Mack
Whether a relative counts as a common-law employee depends on the nature of the working relationship. Common-law employees are defined by the degree of control exerted by the employer over the employee's work and schedule, the financial control held by the employer, and the type of relationship between the two parties. For example, a relative who is paid by the hour, has their schedule set by the employer, and is trained by the employer can be considered a common-law employee. However, there are restrictions on the employment of relatives by public officials, as outlined in 5 U.S. Code § 3110, which aims to prevent nepotism.
| Characteristics | Values |
|---|---|
| Common-law employee definition | According to the IRS, a common-law employee is someone who performs work for an organization that has control over what work is done and how it’s done. |
| Common-law employee test | Behavioral, financial, and relationship |
| Common-law employee factors | The worker is paid by the hour, week or month; the employer sets the worker’s schedule; the worker is restricted from doing work for others; the worker is trained and required to follow instructions |
| Independent contractor | A worker who buys their own equipment and sets their own schedule may be considered free of an employer’s control |
| Relative | Father, mother, son, daughter, brother, sister, uncle, aunt, first cousin, nephew, niece, husband, wife, father-in-law, mother-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, stepfather, stepmother, stepson, stepdaughter, stepbrother, stepsister, half-brother, or half-sister |
| Restrictions on employment of relatives | A public official may not appoint, employ, promote, advance, or advocate for the appointment, employment, promotion, or advancement of a relative in an agency in which the public official serves or has jurisdiction or control |
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What You'll Learn
Common-law employees vs independent contractors
Whether a worker is classified as a common-law employee or an independent contractor has significant implications for a business. This classification impacts taxes and reports submitted to federal and state governments. It is therefore critical that business owners correctly determine the nature of the working relationship.
Common-law employees are those who perform services for an organisation that has control over what work is done and how it is done. This is a traditional employer-employee relationship, where the employer determines the days and hours an individual works, and the level of oversight depends on the worker's experience. Common-law employees may work part-time or full-time. They are entitled to protections under employment and labour laws, and businesses must withhold and deposit income taxes, Social Security taxes, and Medicare taxes from their wages.
Independent contractors, on the other hand, are self-employed and have more freedom to execute their job duties using their own processes. They are typically hired for a specific time period or project and are free to seek out business opportunities. They do not receive the same protections as employees under employment and labour laws, and businesses are generally not required to withhold taxes on payments to independent contractors.
There is no single factor that determines whether a worker is a common-law employee or an independent contractor. Instead, businesses must consider all relevant factors, including behavioural control, financial control, and the type of relationship between the parties. For example, if an individual is provided with training on how to do their job, this indicates an employer-employee relationship, whereas independent contractors typically invest more in tools and resources.
In the context of relatives working for a business, they can be classified as common-law employees if they meet the criteria outlined above. The key consideration is the degree of control the business has over the relative's work and the nature of the working relationship.
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Common-law employee tests
The common-law employee test is a set of guidelines used by the IRS to classify workers as either employees or independent contractors. The test is important for IRS classification purposes and is used to determine whether an employer-employee relationship exists.
The test involves evaluating the relationship between the worker and the business, examining the degree of control and independence. It is made up of three components:
- Behavioural: This involves assessing the amount of control the company has over the employee's work and how they do it. This includes the types and amount of instructions given, such as when, where, and how a worker should perform their work, as well as the tools and equipment they should use.
- Financial: This considers the employer's involvement in the financial aspects of the worker's job, including pay, expense reimbursements, and the provision of tools and equipment.
- Relationship: This evaluates the nature of the relationship between the worker and the company, including whether the worker has a contract or qualifies for benefits, and how crucial the worker's contribution is to the company's operations.
Some states have implemented additional tests to further differentiate between employer-employee relationships and independent contractors.
It is important to correctly classify workers as either employees or independent contractors, as this affects tax and reporting requirements to federal and state governments. Misclassifying workers can result in financial penalties from the IRS.
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Employment restrictions for relatives
Nepotism Restrictions
Nepotism refers to the practice of favouring relatives or friends in employment decisions, such as hiring, promotion, or advancement. In the context of government agencies like the General Services Administration (GSA), there are legal restrictions on public officials employing or promoting their relatives. Public officials within the GSA are prohibited from recommending, advocating for, or referring their relatives for positions within the agency. Similarly, they are restricted from appointing, employing, or promoting their relatives or the relatives of other public officials within the GSA. These restrictions help maintain fairness and prevent potential conflicts of interest in the federal government.
Conflict of Interest
Organisations often have policies in place to address potential conflicts of interest when relatives are employed within the same department, division, or unit. In such cases, relatives may be required to disclose their relationship and develop a management plan approved by human resources and senior management. This plan might include measures such as transferring one of the relatives to a different department or ensuring that one relative does not supervise or evaluate the other. The goal is to minimise any adverse impact on supervision, security, morale, or conflict of interest that may arise from having relatives working together.
Financial Reporting
When relatives work in areas involving financial reporting, purchasing, or approval processes, organisations may require additional measures to mitigate potential conflicts of interest. This could include submitting an "Employment of Relatives" form, organisational charts, position descriptions, and resumes to human resources for review and approval. Such documentation helps ensure transparency and accountability in financial decision-making involving relatives.
Dating Relationships
Some organisations have policies addressing situations where employees develop dating relationships or become relatives. In such cases, the employee in a supervisory position is typically required to inform management and human resources. The employees may be given a specified period to resolve the situation voluntarily, such as through a transfer or employment outside the company. If a resolution is not reached, the organisation may take appropriate action, including transferring or, if necessary, terminating one of the employees.
It is important to note that employment restrictions for relatives can vary based on local laws, industry standards, and organisational policies. While these guidelines provide a general overview, specific regulations may differ across jurisdictions and organisations. Therefore, it is essential to refer to the relevant laws and policies applicable to your specific context.
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Nepotism and conflict of interest
The concept of nepotism and conflicts of interest in the workplace is a complex issue that requires careful navigation. Nepotism, which refers to the practice of favouring relatives or close friends in employment decisions, can often lead to conflicts of interest. This occurs when an employee's personal interests or relationships interfere with their professional responsibilities, potentially impacting their ability to remain unbiased in their thoughts, ideas, and decisions.
In the context of common-law employees, it is essential to understand the nature of the employer-employee relationship. According to the Internal Revenue Service (IRS), a common-law employee is defined by the level of control the employer has over the work performed and how it is executed. This includes behavioural control, financial control, and the type of relationship between the parties. When it comes to relatives working for a family business, the line between family dynamics and professional roles can become blurred, potentially leading to conflicts of interest.
For example, a family member in a managerial position might unintentionally or intentionally provide preferential treatment to a relative during the hiring process, promotions, or performance evaluations. This could create a perception of unfairness among other employees and raise questions about the relative's qualifications and suitability for the role. Additionally, the presence of nepotism can affect workplace dynamics and employee morale, as other employees may feel their contributions are not valued or recognised in the same way.
To address these concerns, organisations should implement robust policies and procedures to prevent and manage conflicts of interest. Disclosure of relationships is a crucial step, as it enables transparency and allows for appropriate actions to be taken. In some cases, assigning an alternative, non-conflicted supervisor or decision-maker can help maintain objectivity. Additionally, establishing clear guidelines for gift acceptance and vendor relationships can prevent potential conflicts, ensuring that professional relationships remain unbiased and free from personal influences.
While nepotism does not automatically imply a conflict of interest, the potential for such conflicts is heightened when relatives are involved. Organisations should strive for fairness and transparency in their employment practices, ensuring that all individuals are evaluated and treated based on their merits, qualifications, and contributions to the organisation, regardless of their personal connections.
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Employee benefits and insurance
The definition of a "common-law employee" is someone who performs work for an organization that has control over what work is done and how it is done. This is a traditional employer-employee relationship, and the designation applies to both full- and part-time employees. Common-law employees differ from independent contractors, who have more control over their work and are self-employed.
When it comes to employee benefits and insurance, it is important to understand the distinction between common-law employees and independent contractors. Employers are responsible for withholding common-law employees' federal income taxes and Federal Insurance Contributions Act (FICA) taxes, which help pay for Medicare and Social Security. On the other hand, independent contractors manage their own taxes and insurance contributions.
In the context of health insurance, the number of common-law employees in a company can impact the type of plan that can be offered. For example, if a company purchases a group plan, they need to report the number of employees. This number may include part-time employees, as some plans allow for combining the hours of part-time employees to count as one or more full-time employees. However, it is important to note that the business owner and their spouse are typically not considered common-law employees and, therefore, would not qualify for a group plan.
Additionally, common-law marriages can create complexities in employee benefits. While some states and Washington, D.C., recognize common-law marriages, employers may choose to exclude them from their definition of a spouse in benefit plans. However, this exclusion may be challenged by employees as a violation of state laws and the constitution. To navigate this issue, employers should seek legal counsel and clearly communicate their definition of a spouse in all plan-related communications.
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Frequently asked questions
A common-law employee is someone who performs work for an organization that has control over what work is done and how it’s done. This is a "traditional" employer-employee relationship.
This depends on the context. For example, in the US, there are restrictions on the employment of relatives in the public sector. A public official may not appoint, employ, promote, or advance any relative in their agency or one they have control over. However, relatives can be employed in the private sector, and whether or not they are considered common-law employees depends on the nature of the working relationship.
The IRS uses a common-law employee test to evaluate the working relationship. The test has three components: behavioural, financial, and relational. For example, how much control does the company have over the employee's work and how they do it? How involved is the employer in the business aspects of the worker’s job? How crucial is the worker to the company's operations?
