Kara Sears
A common-law employer-employee relationship is one in which the employer has the right to control the work of their employees. This includes the work that is done and how it is done. The employer-employee relationship is distinct from that of an independent contractor, where the worker is in business for themselves and is not economically dependent on the employer. The distinction is important for tax withholding purposes, as employers are responsible for withholding federal income taxes and Federal Insurance Contributions Act (FICA) taxes for employees, but not for independent contractors. To determine whether an individual is an employee or an independent contractor, the Internal Revenue Service (IRS) uses a common-law employee test that examines the degree of control and independence in the relationship, including behavioural control, financial control, and the type of relationship between the parties.
| Characteristics | Values |
|---|---|
| Degree of control | The employer has the right to control the work, including what is done and how it is done. |
| Financial control | The employer is involved in financial aspects like pay rates, expense reimbursements, and provision of tools and equipment. |
| Relationship of the parties | The worker's contribution is crucial to the company's operations, and they may have a contract and benefits. |
| Economic realities | The worker is economically dependent on the employer, rather than being in business for themselves. |
| Opportunity for profit or loss | The worker can earn profits or suffer losses through their independent effort and decision-making. |
| Skill and initiative | The worker's skills and initiative are considered. |
| Hiring and firing | The employer controls the hiring and firing of the worker. |
| Scheduling | The employer determines the days and hours the worker works. |
| Work location and time | Not relevant to determining employment status. |
| Job title | Not relevant to determining employment status. |
| Mode of payment | Not relevant to determining employment status. |
| Right to quit | Employees can typically end the relationship at any time without liability. |
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What You'll Learn
Control over work
The common law control test is a way to determine whether a worker is an employee or an independent contractor. The test assesses the degree of control that an employer has over a worker's activities. The right to exercise control is significant, even if the control is not actually exercised.
Under common-law rules, a worker is considered an employee if their employer can control what will be done and how it will be done. This is true even when the employee is given freedom of action. The substance of the relationship, not the label, governs the worker’s status. It does not matter whether the individual is employed full-time or part-time.
Factors that indicate control include hiring, firing, scheduling, prices, pay rates, supervision of performance, and the right to discipline workers. Where the employer maintains more control over these aspects of the work relationship, this factor weighs in favor of employee status. Conversely, where the employer maintains less control, this factor weighs in favor of independent contractor status.
Other factors that indicate employee status include permanence and exclusivity in the relationship. For example, a cook who prepares food for an entertainment venue with regularly scheduled events each week and does not cook for other venues would likely be considered an employee under the permanence factor.
On the other hand, factors that indicate independent contractor status include the worker providing their own tools, having a financial investment in the business, and having the freedom to market their services to multiple clients and set their own prices. For example, a nurse who provides specialty movement therapy to residents at multiple nursing homes in the community, sets their own prices, and is not supervised by any one facility would likely be considered an independent contractor.
It is important to note that no single factor determines a worker’s status, and the economic reality test considers multiple factors to determine if a worker is economically dependent on the employer or is in business for themselves.
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Financial control
The common-law employer-employee relationship is determined by the degree of control and independence between the two parties. Financial control is one of the three categories that provide evidence of the degree of control and independence in this relationship. The other two categories are behavioural control and the type of relationship of the parties.
Significant Investment
Although there are no specific dollar amounts a worker must meet to be considered making a "significant investment," independent contractors generally invest a lot more in the tools and resources they use than employees.
Unreimbursed Expenses
The extent to which workers incur unreimbursed expenses can indicate whether they are an employee or independent contractor. Employees are generally reimbursed for expenses incurred while performing their duties, whereas independent contractors are not.
Training
If the employer trains the worker on how to do their job, it indicates that the employer wants the job done in a particular way, suggesting that the worker is an employee. An independent contractor is free to execute their job duties using their own process.
Compensation
Employees are generally required to receive a W-2 form and are compensated through salaries, wages, and benefits such as health insurance. Independent contractors, on the other hand, receive Form 1099-MISC and are compensated through fees, commissions, or other forms of payment.
Right to Quit
An employee typically has the right to end the relationship with the employer at any time without incurring liability. An independent contractor, on the other hand, usually agrees to complete a specific job and is responsible for its satisfactory completion.
It is important to note that financial control is just one aspect of the common-law test used to determine whether a worker is an employee or an independent contractor. Other factors, such as behavioural control and the type of relationship between the parties, must also be considered to make a comprehensive determination.
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Relationship type
The relationship type between an employer and a common-law employee is one that is based on the amount of control the employer has over the employee. This is the primary consideration when applying the common-law test.
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 a traditional employer-employee relationship. The employer dictates what the employee does, and the employee is dependent on the employer for work.
Factors that might determine a common-law employment relationship include: the employee is assigned to work specific days and hours as needed by the employer; the employee's decisions are subject to employer approval; the employee must provide regular updates to the employer; the employee is paid a specified amount as a salary or hourly worker; the employer pays medical insurance and other benefits to the employee.
The distinction between a common-law employee and an independent contractor is important for tax withholding purposes. An independent contractor is usually in business for themselves and is responsible for managing their own taxes and insurance contributions.
To determine whether an individual is an employee or an independent contractor, the relationship of the worker and the business must be examined. The economic reality test uses multiple factors to determine if an employment relationship exists. The goal of the test is to decide if the worker is economically dependent on the employer for work or is instead in business for themselves.
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Employment benefits
A common-law employer-employee relationship is determined by the degree of control and independence between the two parties. This relationship falls into three categories: behavioural control, financial control, and the type of relationship of the parties.
In terms of employment benefits, a common-law employer-employee relationship offers a more stable and secure work arrangement for the employee. Here are some specific advantages:
- Job Security: Employees in a common-law relationship typically have more job security than independent contractors. Employers are less likely to terminate their employment without just cause, as they have a greater investment in the employee's work and performance.
- Benefits and Perks: This type of relationship often comes with benefits such as health insurance, life insurance, and retirement plans. For example, in the given scenario, Bob, the employer, provides health insurance and group-term life insurance for his salesperson, Donna Lee.
- Bonuses and Incentives: Employees may be eligible for bonuses, prizes, and other performance-based incentives. In the same scenario, Donna Lee, as an employee, is eligible for prizes and bonuses offered by her employer.
- Steady Income: Common-law employees often receive a consistent salary or wage, which can provide financial stability and make budgeting easier. In Donna's case, she receives a commission for her sales work, which provides a more predictable income stream.
- Legal Protections: Employees are generally afforded greater legal protections than independent contractors. They may have stronger rights regarding termination, discrimination, and labour laws, and they may be able to join or form a union to collectively bargain for better working conditions.
- Training and Development: Employers often provide training and professional development opportunities to enhance their employees' skills, which can lead to career advancement and improved job performance.
While these are potential benefits, it is important to note that each employer-employee relationship is unique, and the specific advantages may vary depending on the organisation, industry, and local laws and regulations.
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Worker classification
In the United States, the Internal Revenue Service (IRS) and the Fair Labor Standards Act (FLSA) provide guidance on worker classification. According to the IRS, under common-law rules, an individual is considered an employee if their employer has the right to control what will be done and how it will be done, regardless of whether the employer actually exercises this control. The degree of control and independence fall into three categories: behavioural control, financial control, and the type of relationship between the parties. The substance of the relationship, rather than the label, determines the worker's status.
The FLSA takes a broader approach, considering the economic realities of the worker's relationship with the employer. If the worker is economically dependent on the employer, they are likely an employee. On the other hand, if they are in business for themselves, they are considered an independent contractor. Additional factors, such as hiring, firing, scheduling, pay rates, supervision, and discipline, can also be considered when determining worker classification under the FLSA.
In Canada, the Supreme Court of Canada has clarified that courts and tribunals must consider the policy objectives of the relevant statute when deciding on employee status. The Labour Program's investigative process reflects these policy goals, which aim to ensure minimum employment standards and prevent accidents and injuries in federally regulated enterprises. The Employment Relationship Questionnaire is used to gather information and assess whether a worker is an employee or an independent contractor.
It's important to note that worker classification can vary depending on the specific laws and regulations being applied, and there may be cases where a worker is classified as an employee under one law but not another.
To summarise, worker classification depends on a range of factors, including the degree of control, economic realities, and the specific laws being applied. When determining worker classification, it is essential to examine the totality of the relationship between the worker and the employer.
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Frequently asked questions
A common-law employer-employee relationship is one in which the employer has the right to control the work of the employee.
Factors that determine a common-law employer-employee relationship include:
- The employer determines the days and hours an individual works.
- The employer has to approve all the individual’s decisions, and the level of oversight depends on the worker’s experience and length of service.
- The employee has to provide regular updates to the employer.
- Customers or clients belong to the employer, not the worker.
- The employee is paid a specified amount as a salary or hourly worker.
- The employer pays medical insurance and other benefits to the employee.
A common-law employee is different from an independent contractor in that the employer has the right to control the work of the employee. An independent contractor is typically in business for themselves and is not economically dependent on the employer for work.
The common-law test is used to determine whether a worker is an employee or an independent contractor. The test has three components: behavioural control, financial control, and the type of relationship between the parties.
The distinction between a common-law employee and an independent contractor is important for tax withholding purposes. The IRS automatically assumes workers are common-law employees unless the company can prove otherwise. Designating a worker as an employee makes the employer responsible for withholding that person’s federal income taxes and FICA taxes.
