Common-Law Test

What Is Common-Law Test?

The Common-Law Test is a method used to determine whether someone is an employee or an independent contractor. It examines the relationship between the worker and the business, considering factors such as the degree of control the business has over the worker's tasks, how the worker is paid, who provides the tools/resources for the work, and the extent of the worker's discretion in conducting activities. This test is commonly used for tax and employment law purposes.

What Is the History of Common-Law Test?

The Common-Law Test, also known as the Common-Law Rule, traces its roots to the historic master-servant law in England. Under this ancient law, the employer-employee relationship was perceived through the lens of the master-servant relationship, where the 'master' had a high degree of control over the 'servant's' work.

As societies evolved and work relationships became more complex, courts in England and subsequently in the United States started using a set of factors to determine whether a person is an employee or an independent contractor. These factors, commonly referred to as the Common-Law Test, have been used and refined over the years by various courts and agencies, including the IRS, to clarify the nature of worker relationships.

Arguably, one of the most significant events in the history of the Common-Law Test was in 1947 when the U.S. Supreme Court case "NLRB v. Hearst Publications, Inc." challenged the traditional application of the test, highlighting the need to consider 'economic realities' of the worker's dependence on the business. While this led to the development of other tests such as the 'economic realities test', the value of the Common-Law Test endures, and it continues to be used, especially for tax purposes.

What Are Some Examples of Common-Law Test?

The Common-Law Test, used to determine whether a worker is an employee or an independent contractor, is based on several factors, primarily focusing on the level of control the employer has over the worker. The principles include:

1. Instruction: An employee is required to comply with instructions about when, where, and how to work. The control factor is present if the employer has the right to direct the way tasks are carried out.

2. Training: Employees are trained by an experienced worker who requires them to work in a certain way. Independent contractors generally use their own methods.

3. Integration: Integration of the worker's services into the business operations generally shows that the worker is subject to direction and control.

4. Services Rendered Personally: If the services must be rendered personally, it implies that the employer is interested in the methods used along with the results.

5. Hiring, Supervising, and Paying Assistants: If the employer hires, supervises, and pays assistants, this generally shows control over the workers on the job.

6. Continuing Relationship: A continuity of relationship between the worker and the employer indicates that an employer-employee relationship exists.

7. Set Hours of Work: The establishment of set hours of work by the employer is a factor indicating control.

8. Full Time Required: If the worker must devote full-time to the employer's business, the employer has control over the worker's time.

9. Doing Work on Employer's Premises: If the work is performed on the premises of the employer, that factor suggests control over the worker, especially if the work could be done elsewhere.

These factors are by no means exhaustive and are not applied rigidly. The main focus is on the level of control an employer has over a worker, and the weight given to each factor can vary depending on the specific case.

What Distinguishes the Common-Law Test From the ABC Test in Determining Employment Status?

The Common-Law Test and the ABC Test are both used to determine a worker's employment status, but they have different criteria and focal points.

The Common-Law Test primarily focuses on the level of control an employer has over a worker. It considers a range of factors, such as the degree of instruction provided by the employer, the methods of payment and provision of tools or resources, and the level of independence the worker has in carrying out their tasks. The key question is: "Does the employer have the right to control the worker in terms of 'how' the work is completed as well as the 'result' of the work?"

On the other hand, the ABC Test is typically more stringent and is designed to make it harder for companies to classify workers as independent contractors rather than employees. It has three conditions, all of which must be met for a worker to be considered an independent contractor. The worker must:

A: Be free from the company's control and direction in performing the work. B: Perform work that is outside the usual course of the company's business. C: Be engaged in an independently established trade, occupation, or business of the same nature as the work performed.

The ABC test, therefore, is generally seen as a more worker-friendly test, often resulting in more workers being classified as employees, which carries with it certain obligations for the employer like minimum wage, overtime pay, and workers' compensation.

What Are Examples Illustrating the Application of the ABC Test?

Here are some hypothetical scenarios to illustrate how the ABC Test might apply:

1. Graphic Designer for a Restaurant: A graphic designer who works from home, sets her own hours, uses her own tools and software, and offers her design services to other businesses as well would likely pass the ABC Test as an independent contractor. She is free from the restaurant's control (Criterion A), her work is outside the restaurant's usual course of business which is food service (Criterion B), and she is engaged in her own established trade (Criterion C).

2. Plumber for a Plumbing Company: A plumber who works full-time for a plumbing company, using the company's tools and supplies, following the company's guidelines and schedules, and does not offer services to other clients would likely fail the ABC Test as an independent contractor and would be considered an employee. The plumber is not free from the company's control (fails A), his work is directly within the company's usual course of business (fails B), and he is not engaged in his own established trade (fails C).

3. Web Developer for a Software Company: A web developer who works on projects for a software company but maintains other clients, sets their own schedule, works remotely, and uses their own equipment could possibly still be considered an employee under the ABC Test. While they may meet Criteria A and C, if they are developing a software product for the company that is within the company's usual course of business, they would fail Criterion B.

Remember that under the ABC Test, all three criteria must be met for a worker to be considered an independent contractor. If any of the conditions is not met, the individual will generally be classified as an employee.

How Do the Common-Law Test and IRS Test Differ in Determining Employment Status?

The Common-Law Test and the Internal Revenue Service (IRS) Test are similar because they both aim to assess the relationship between a worker and a company to determine employment status. However, the IRS test, officially known as the IRS 20 Factor Test, more precisely delineates the factors to be evaluated in three primary categories - behavioral control, financial control, and type of relationship.

1. Behavioral Control: This considers if the business has a right to direct and control how the worker does the task. It includes aspects like instructions, training, and the degree of instruction (more detailed instructions imply that the worker is an employee).

2. Financial Control: This entails aspects like significant investment, unreimbursed expenses, opportunity for profit or loss, services available to the market, and method of payment. Independent contractors usually have a significant investment in the equipment they use and make their services available to other businesses.

3. Type of Relationship: This involves examining written contracts, employee benefits like insurance, vacation pay, pension plans, the permanency of the relationship, and the extent to which services performed are key to the business.

While the Common-Law Test criteria are part of the IRS test, the IRS provides more specific factors to look at within each category. The IRS and Common-Law Tests may sometimes yield different results, making them appropriate for different contexts and purposes. Thus, whereas companies might sometimes prefer using the Common-Law Test for its comparatively broader leeway, the IRS Test may be used to satisfy tax obligations.

What Are Some Specific Examples Illustrating the Application of the IRS Test?

Below are some scenarios to illustrate how the IRS Test might be applied:

1. Marketing Consultant for a Manufacturer: A marketing consultant who works with a manufacturing firm on a project-by-project basis, sets his own hours, works from his home office, uses his own equipment, incurs his own expenses, and also offers consulting services to other businesses can be seen as an independent contractor according to the IRS Test. He has both behavioral and financial control over his work (he determines how and when the work is done, and has a significant investment in his business), and the relationship is not permanent but project-based.

2. Administrative Assistant in an Office: An administrative assistant who works full-time in an office, uses the office's equipment, follows the office's procedures and policies, receives training on the tasks, is paid a salary and given health benefits, and works indefinitely would likely be classified as an employee under the IRS Test. The employer has behavioral control (guidelines, training), financial control (investments, method of payment), and the relationship is permanent with employee benefits.

3. Software Engineer for a Tech Start-up: A software engineer who develops software for a tech start-up, working in the startup's office, using the startup’s equipment, working under the company's deadlines but without employee benefits could be seen as an employee under the IRS Test. Despite the lack of benefits and perhaps a less formalized working relationship, the company nonetheless exercises both behavioral and financial control, and the engineer's work is key to the business.

These examples show that the IRS test examines the nature of the relationship from several angles. It is important to note that no one factor is decisive; the totality of the relationship determines the worker's status.

What Factors Are Considered in the Application of the Common-Law Test?

When applying the Common-Law Test to evaluate whether a worker is an employee or an independent contractor, a variety of factors related to the degree of control and independence are considered. These factors include:

1. Instruction and training: If a worker receives detailed instructions about how work is to be done, or receives training, this suggests the worker is an employee.
2. Integration: If the worker's services are integrated into the business operations, this suggests an employer-employee relationship.
3. Services rendered personally: When services must be performed personally by the worker, it is likely that the employer is interested in both the methods and the results, suggesting an employer-employee relationship.
4. Hiring, supervision and paying assistants: If the employer hires, supervises, or pays assistants, this generally indicates control over the workers, suggesting an employer-employee relationship.
5. Continuing relationship: A continuing relationship between the worker and employer suggests an employer-employee relationship.
6. Set hours of work: If the employer sets the hours of work, this suggests an employer-employee relationship.
7. Full-time required: If the worker must work full time, this suggests an employer-employee relationship by limiting the worker's ability to do other gainful work.
8. Work done on premises: If the work is performed on the premises of the employer, this suggests an employer-employee relationship, particularly when the work could be done elsewhere.
9. Order or sequence set: If the work must be performed in a certain order or sequence, this suggests an employer-employee relationship.
10. Reports: If the worker must submit regular reports, this suggests an employer-employee relationship.
11. Payment method: Payment by the hour, week, or month suggests an employer-employee relationship, whereas payment by the job or on a commission basis suggests an independent contractor status.
12. Expenses: If the employer pays the worker's business and travel expenses, this suggests an employer-employee relationship.
13. Furnishing tools and materials: If the employer provides the worker's tools, materials, and other equipment, this suggests an employer-employee relationship.
14. Investment: A significant investment by the worker in the facilities used to perform services suggests an independent contractor status.
15. Profit or loss: A worker's ability to realize a profit or incur a loss suggests an independent contractor status.
16. Work for more than one firm at a time: If a worker performs services for more than one firm at the same time, this suggests an independent contractor status.
17. Offering services to general public: If a worker makes his or her services available to the general public on a regular and consistent basis, this suggests an independent contractor status.

It's important to note that no one factor is decisive in making this determination. The entire relationship, including the degree of each factor, is examined on a case-by-case basis.

What Advantages Does the Common-Law Test Offer in Determining Employment Status?

The Common-Law Test, used to ascertain whether a worker is an employee or an independent contractor, offers several advantages:

1. Flexibility: The Common-Law Test often incorporates a range of factors, none of which is individually determinative, allowing for important nuances in different employment situations to be taken into account.

2. Predominance of Control Test: The Common-Law Test primarily hinges on the control principle, which is an easily understandable concept when characterizing a worker's status.

3. Broad Application: The test has a broad application across different sectors and job types because it is not specific to any profession or industry.

4. Historically Accepted: The Common-Law Test has a long history and its principles are widely recognized and understood.

5. Consideration of Entire Relationship: The Common-Law approach allows an assessment of the entire relationship between the firm and the worker, rather than relying on a strict list of factors.

That said, it's important to note that the application of the Common-Law Test can also be ambiguous due to its multifactor and subjective nature, leading to potential confusion or disputes over worker status. It's always recommended that businesses seek legal guidance when making determinations about worker classifications.

What Are the Potential Drawbacks of Using the Common-Law Test to Determine Employment Status?

While the Common-Law Test offers several advantages as mentioned earlier, there are also some potential drawbacks to using this method to determine employment status:

1. Ambiguity and Subjectivity: The Common-Law Test is multifactor and flexible, which can lead to subjective interpretations and outcomes. The same set of factors can lead different observers to arrive at different conclusions regarding worker status.

2. Lack of Specific Guidance: There are no strict guidelines or scores associated with each factor, making it uncertain how much weight should be given to each factor in deciding the overall status.

3. Changing Work Arrangements: As the work landscape evolves with increasingly flexible and remote work arrangements, the traditional factors used in the Common-Law Test may not accurately reflect the nature of modern employment relationships.

4. Legal Uncertainty and Disputes: The inherent ambiguity of the test can lead to legal disputes, with potential financial, reputational, and operational implications for businesses.

5. Inconsistent Application: Different courts or agencies may put different emphasis on the factors or interpret them differently, leading to inconsistent results.

These drawbacks suggest that while the Common-Law Test can be an effective tool for determining employment status in many scenarios, it may not be suited to all cases, and should be used in conjunction with professional legal advice.

Which Employers Are Likely to Be Affected by Common-Law Test?

Many types of employers can potentially be affected by the Common-Law Test, particularly those who use or consider using independent contractors, freelancers, and consultants instead of, or in addition to, regular employees. These can include:

1. Technology Companies: Tech companies, including app-based platforms like Uber, Lyft, and others in the gig economy, often use independent contractors for their core operations.

2. Construction Companies: Such businesses often hire contractors for specific projects.

3. Consulting Firms: These often engage independent consultants to work on specific projects or for a specified time period.

4. Retail Businesses: Retailers can hire contractors for areas such as merchandising, equipment repair, or software and hardware installation.

5. Healthcare Providers: Healthcare facilities may hire independent contractors for various services, like specialized medical services, cleaning, or bookkeeping.

6. Universities and Schools: Educational institutions can engage independent contractors for various tasks such as research, guest lecturing, and consultancy services.

In short, the Common-Law Test can affect any employer who currently uses, or is considering using, non-employee labor. Incorrectly classifying an employee as an independent contractor can lead to legal disputes, financial penalties, and reputational harm, making it critical for these firms to appropriately determine worker status.