Gavin Howe
In North Carolina, the distinction between an independent contractor and a common-law employee is important for determining the applicability of the FLSA/WHA, which guarantees certain rights to employees, such as a minimum wage of $7.25 per hour and limits on working hours. A common-law employee, according to the IRS, is someone who performs work for an organization that has the right to control what work is done and how it is done. This is assessed through a common-law employee test, which examines the behavioural, financial, and relationship aspects of the work arrangement.
| Characteristics | Values |
|---|---|
| Nature of the relationship | The substance of the relationship, not the label, governs the worker’s status. |
| Control | The employer has the right to control the work they do and how it is done. |
| Full-time or part-time | Both full-time and part-time employees can be classified as common-law employees. |
| Benefits | Common-law employees are entitled to benefits such as health insurance, sick leave, vacation pay, and retirement contributions. |
| Pay | Common-law employees are typically paid by the hour, week, or month. |
| Employment tests | Common-law employee tests are used to evaluate the nature of the relationship. |
| State-specific tests | Some states have implemented additional tests to differentiate between common-law employees and independent contractors. |
| Independent business | A common-law employee does not have an independent business that performs the same or similar work. |
| Work hours and approval | The employer determines the days and hours an individual works and must approve all decisions. |
| Updates | The employee has to provide regular updates to the employer. |
| Customers or clients | Customers or clients belong to the employer, not the worker. |
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What You'll Learn
Common-law employee vs independent contractor
In the US, there are a set of guidelines, known as the Common-Law Test, used by the IRS to classify workers as either employees or independent contractors. This test is important for IRS classification purposes and evaluates the nature of the relationship between the worker and the business.
A common-law employee is someone who performs work for an organization that has behavioural and financial control over what work is done and how it’s done. This is a traditional employer-employee relationship, and the designation applies to both full- and part-time employees.
The test has three components:
- Behavioural: How much control does the company have over the employees' work and how they do it?
- Financial: How involved is the employer in the business aspects of the worker’s job? How much control does the employer have over when and how much the worker is paid, expense reimbursements, and the tools and equipment used to do the work?
- Relationship: How crucial is the worker to the operations of the company? Does the worker have a contract or qualify for benefits?
Some other factors that may indicate whether a worker is an employee or an independent contractor include:
- Permanency of the relationship: Employees are often hired for an indefinite period, while independent contractors are usually hired for a specific time period or project.
- Evaluation system: If there is an evaluation system in place, this would indicate that the worker is an employee. If the evaluation only judges the end result, the worker could be either an employee or an independent contractor.
- Training: If the worker is trained by the business, this indicates that they are an employee. An independent contractor is free to execute their job using their own process.
- Opportunity for profit or loss: The more profit a worker makes, the more likely it is that they are an employee. The more losses they incur, the more likely it is that they are an independent contractor.
- Services available to the market: Independent contractors are free to seek out business opportunities.
It is important to correctly determine whether a worker is an employee or an independent contractor as this affects the taxes and reports businesses and workers submit to federal and state governments. For example, businesses must withhold and deposit income taxes, Social Security taxes, and Medicare taxes from the wages paid to an employee. Businesses do not have to do the same withholdings for independent contractors, who are responsible for managing their own taxes and insurance contributions.
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Employment relationship vs contractual relationship
An employment relationship is a contract between an employer and an employee, where both parties agree to exchange promises voluntarily. The relationship is based on mutual gains if the agreement is fulfilled and mutual losses if it is not. Employment relationships are based on contract and amount to an agreement between the parties, employer and employee, with mutual obligations to work and to pay for the work.
A contractual relationship, on the other hand, is not the same as an employment relationship. At-will employment, for example, is a type of contractual relationship where both the employer and employee have the right to walk away from the relationship for any or no reason, at any time. This is the most common type of employment relationship in the United States. However, it is not a contractual relationship, and labelling it as such makes it harder to regulate employment and reinforces the power imbalance between employers and employees.
When it comes to distinguishing an employment relationship from a strictly contractual one, the Fair Labor Standards Act (FLSA) states that an employee is dependent on the business they serve. The employer-employee relationship under the FLSA is tested by "economic reality" rather than "technical concepts". The economic reality test uses multiple factors to determine if an employment relationship exists under the FLSA. This includes looking at the opportunity for profit or loss depending on managerial skill and the degree of permanence of the work relationship.
In the state of North Carolina, an employment relationship under the FLSA/WHA must be distinguished from a strictly contractual one. The Act also has child labour provisions that regulate the employment of minors under the age of eighteen.
According to common-law rules, anyone who performs services for an organisation is an employee if the organisation has control over what will be done and how it will be done. This is the case even when the employee is given freedom of action. Designating a worker as an employee as opposed to an independent contractor makes the employer responsible for withholding that person's federal income taxes and the Federal Insurance Contributions Act (FICA) taxes. To determine whether an individual is an employee or an independent contractor, the relationship of the worker and the business must be examined.
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Control and direction from employer
The degree of control and direction that an employer has over an employee is a key factor in determining whether an individual is a common-law employee or an independent contractor. According to the IRS, a common-law employee is someone who performs work for an organisation that has control over what work is done and how it is done. This is the traditional employer-employee relationship, and it applies to both full and part-time employees.
The level of control and direction from the employer is assessed through a common-law employee test, which has three components: behavioural, financial, and relational. The behavioural component evaluates the amount of control the employer has over the employee's work and how they do it. This includes the employer's right to control the work performed, the days and hours worked, and the level of oversight. The financial component looks at the employer's involvement in the business aspects of the employee's job, such as pay, reimbursements, and provision of tools and equipment. The relational component considers the worker's contribution to the company, including whether they have a contract or qualify for benefits.
The common-law employee test is important for IRS classification purposes. If a worker is designated as an employee, the employer is responsible for withholding federal income taxes and FICA taxes, which fund Medicare and Social Security. Employers must also obtain workers' compensation insurance and provide benefits such as health insurance and retirement plans for employees. On the other hand, independent contractors manage their own taxes and insurance contributions, and they are not entitled to the same benefits as employees.
The distinction between an employee and an independent contractor is not always clear-cut. For example, trainees or students may be considered employees depending on the circumstances of their activities for the employer. Additionally, individuals who perform work at their homes are often improperly classified as independent contractors when they should be considered employees under the law. To determine whether an individual is an employee or an independent contractor, it is necessary to examine the relationship between the worker and the business and consider all information that provides evidence of the degree of control and independence.
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Benefits and compensation
In North Carolina, workers' compensation laws provide employees with medical treatment and compensation for lost time from work due to qualifying work-related injuries or conditions. This includes a weekly compensation benefit for time lost from work, which is 66 2/3% of the employee's average weekly wage, up to a maximum set annually by the North Carolina Industrial Commission. The Industrial Commission must determine the wage-earning capacity of the injured worker before deciding on total disability.
Most workers in North Carolina are covered by the state's workers' compensation system, which requires businesses with three or more employees to carry insurance coverage for work-related injuries. This insurance covers 100% of approved medical benefits, and the insurer has the right to direct the employee's medical care, including choosing their doctor(s). While workers' compensation does not require insurance companies to pay for pain and suffering, employees can file a personal injury lawsuit against a third party if they are at fault for the injury.
In terms of wages, North Carolina employers must pay at least the minimum wage of $7.25 an hour and time and a half overtime pay for hours worked over 40 in a workweek, unless the employee is exempt. Employers are not required to give mandatory wage benefits such as vacation pay, sick leave, jury duty pay, and holiday pay. However, once a promise is made, the employer must pay all promised wages and benefits and make their wage practices and policies available to employees in writing or through a posted notice. Earned vacation pay, commissions, and bonuses cannot be forfeited unless there is a written forfeiture clause in the employer's policy.
Additionally, employers must grant time off for jury duty, school activities (up to four hours), and domestic violence situations, but they are not required to compensate employees for this time. Employers are also not legally obliged to offer bereavement leave or time off to attend a close family member's funeral. However, state employees and those participating in commissions, boards, and agencies are entitled to a maximum of 40 hours of paid bereavement leave in the event of an immediate family member's death.
Federal law requires employers with 50 or more full-time employees to offer healthcare benefits, including health insurance. In North Carolina, employers are prohibited from discriminating against employees based on age, race, sex, religion, national origin, colour, disability, or pregnancy, and employees have the right to a safe workplace free of potential hazards.
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Tests to determine worker classification
In North Carolina, the Employee Classification Section is responsible for investigating reports of employee misclassification. While the sources do not specify which test is used in North Carolina, there are two main methods used in the U.S. to classify a worker: the Common Law Test and the ABC Test.
Common Law Test
The Common Law Test is used by the IRS, New York, the District of Columbia, and 17 other states. It determines worker classification by examining behavioral control, financial control, and the relationship between the parties for each job.
The Common Law Test considers the following:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does their job?
- Financial: Are the business aspects of the worker's job controlled by the payer? This includes factors such as how the worker is paid, whether expenses are reimbursed, and who provides tools and supplies.
- Type of relationship: Are there written contracts or employee-type benefits (e.g. pension plans, insurance, vacation pay)? Is the relationship expected to continue, and is the work performed a key aspect of the business?
ABC Test
The ABC Test is used by California and the Department of Labor, and some states only abide by specific parts of the test. The test considers the following:
- Is the worker free from the control and direction of the hiring company in terms of how they perform their work?
- Does the worker perform work that is unusual to or away from the hiring company's facilities?
- Is the worker customarily engaged as an independent contractor in this trade or occupation?
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Frequently asked questions
A common-law employee is someone who performs work for an organisation that has control over what work is done and how it’s done.
Designating a worker as an employee as opposed to an independent contractor makes the employer responsible for withholding that person’s federal income taxes and the Federal Insurance Contributions Act (FICA) taxes, which help pay for Medicare and Social Security.
To determine whether someone is a common-law employee, companies can apply a simple common-law employee test to evaluate the relationship. The test has three components: behavioural, financial, and relational.
The behavioural component evaluates how much control the company has over the employees' work and how they do it.
The financial component looks at how involved the employer is in the business aspects of the worker’s job. This includes how much they control pay, expense reimbursements, and the tools and equipment used to do the work.
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