A common-law employee is someone who performs tasks under the control of an employer, both in terms of the work done and the manner in which it is carried out. This traditional employer-employee relationship applies to full-time and part-time workers.
Key Factors in Determining a Common-Law Employee
- Work Schedule: The employer sets the employee's work days and hours.
- Decision Approval: The employer must approve the employee's decisions, with oversight varying based on experience and tenure.
- Reporting Requirements: The employee provides regular updates to the employer.
- Client Relationship: Clients or customers are associated with the employer, not the individual worker.
- Compensation and Benefits: The employer pays a set salary or hourly wage and provides benefits like medical insurance.
Importance of Employee Classification
Classifying a worker correctly as a common-law employee is crucial for tax purposes. Employers are responsible for withholding federal income taxes and FICA taxes for employees, unlike independent contractors who manage their own taxes and contributions.
Misclassifying employees to evade obligations or reduce administrative burdens can lead to severe penalties. A common-law employee test helps ensure proper classification and consists of three parts:
- Behavioural Control: Assessing the employer's influence over the work and its execution.
- Financial Control: Evaluating the employer's role in the financial aspects of the job, including payment methods and provision of tools.
- Nature of Relationship: Determining the worker’s role within the company, including contracts and eligibility for benefits.
Additional state-specific tests may apply, focusing on the nature of the work, the worker's independence, and the relationship with the employer.
Differentiating Between Independent Contractors and Common-Law Employees
- Example of an Employee
Jane, a software developer, is employed by a tech company. She receives a regular salary with tax withholdings and benefits like health insurance. Her supervisor assigns her projects, and she uses company-provided equipment to complete her tasks during set working hours. As her employer has significant control over her work and provides necessary tools and benefits, Jane is classified as an employee.
- Example of an Independent Contractor
Tom, a freelance graphic designer, works for various clients, including a publishing firm. He sets his rates, works on his schedule, and uses his equipment. The publishing firm provides project briefs, but Tom decides how to execute them. He invoices for his completed work and handles his taxes and insurance. Tom's autonomy and provision of specialized services independent of the firm's direct control classify him as an independent contractor.