Tennessee Now Uses the 20-Factor IRS Test to Identify Independent Contractors (vs. Employees)
Miller & Martin PLLC Alerts | June 24, 2019
Author: Stacie Caraway
The Tennessee General Assembly has recently passed two laws which will impact Tennessee employers. One, addressed below, redefines “independent contractors” vs. “employees” for purposes of Tennessee state law benefits such as unemployment and workers’ compensation. The other is that Tennessee’s Anti-Bullying Law Now Applies to Private Employers (click here to read more).
Some of you may be surprised to know that our great State of Tennessee does not use the same definition as the federal government, specifically the IRS, when it comes to defining “independent contractors” vs. “employees.”
Thus, even if a Tennessee employer had received a positive Revenue Ruling from the IRS regarding a worker or a group of workers saying the worker(s) were not employees for purposes of federal income and Social Security taxes, this did not necessarily mean the employer would receive the same determination from the State of Tennessee regarding state-governed benefits such as unemployment or workers’ compensation.
The Good News is Tennessee employers will only have to concern ourselves with this dichotomy for a few more months, as effective January 1, 2020, the State of Tennessee will begin using the same 20-factor test the IRS does to determine “independent contractors” vs. “employees.” This decision by our General Assembly comes on the heels of other states such as California deciding to retain the three-factor “ABC” test Tennessee has been using to make such determinations for purposes of assessing unemployment taxes. The “ABC” factors are simply (A) Is the worker free from the control and direction of the hiring entity regarding the performance of the work, both under the terms of any contract between the worker and this entity and in fact; (B) Is the work the worker is performing outside the usual course of the hiring entity’s business; and (C) Is the worker customarily engaged in an independently established trade, occupation or business of the same nature as the work he/she is performing for the hiring entity. Tennessee added the additional consideration of “whether the worker performed the work on the hiring entity’s premises” to factor (B). For purposes of defining “employee” under Tennessee workers’ compensation laws, the General Assembly had previously adopted seven (7) considerations:
- The right to control the conduct of the work;
- The right of termination;
- The method of payment;
- The freedom to select and hire helpers;
- The furnishing of tools and equipment;
- Self-scheduling of working hours; and
- The freedom to offer services to other entities.
By contrast, the 20-factor IRS standard considers:
- Whether the worker is required to comply with other persons’ instructions about when, where, and how the worker is to work.
- Whether the worker must be trained by an experienced employee through correspondence, mandatory meetings, or other methods indicating that the person(s) for whom the services are performed want the services performed in a particular method or manner.
- Whether the worker’s services are integrated into the business operations, which, if present, generally shows that the worker is subject to direction and control.
- If the services must be rendered personally, then the persons for whom the services are performed are presumably interested in the methods used to accomplish the work, as well as in the results.
- If the person(s) for whom the services are performed hire, supervise, and pay assistants, then that generally shows control over the workers on the job.
- A continuing relationship between the worker and the person(s) for whom the services are performed indicates that an employer-employee relationship exists. A continuing relationship may exist where work is performed at frequently recurring, although irregular, intervals.
- The establishment of set hours of work by the person(s) for whom the services are performed is a factor indicating control.
- If the worker must devote substantially full time to the business of the person(s) for whom the services are performed, then the person(s) has control over the amount of time the worker spends working and impliedly restrict the worker from doing other gainful work. An independent contractor is free to work when and for whom he/she chooses.
- If the work is performed on the premises of the person(s) for whom the services are performed, then that suggests control over the worker, especially if the work could be done elsewhere.
- If a worker must perform services in the order or sequence set by the person(s) for whom the services are performed, or if the person(s) for whom the services are to be performed retains the right to control the sequence, then that shows the worker is not free to follow the worker’s own pattern of work, but, instead, must follow the established routines and schedules of the person(s) for whom the services are performed.
- A requirement that the worker submits regular or written reports to the person(s) for whom the services are performed indicates a degree of control.
- Payment to the worker by the hour, week, or month generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment made by the job or on straight commission generally indicates the worker is an independent contractor.
- If the person(s) for whom the services are performed ordinarily pays the worker’s business or traveling expenses, then the worker is ordinarily an employee.
- The fact that the person(s) for whom the services are performed furnishes significant tools, materials, and other equipment tends to show the existence of an employer-employee relationship.
- If the worker invests in facilities that are used by the worker in performing services and are not typically maintained by employees, such as the maintenance of an office rented at fair value from an unrelated party, then that tends to indicate that the worker is an independent contractor. However, lack of investment in facilities indicates dependence on the person(s) for whom the services are performed for the facilities and the existence of an employer-employee relationship.
- A worker who can realize a profit or suffer a loss as a result of the worker’s services, in addition to the profit or loss ordinarily realized by employees, is generally an independent contractor, but the worker who cannot is an employee.
- If a worker performs more than de minimis services for multiple, unrelated persons or firms at the same time, then that generally indicates that the worker is an independent contractor.
- The fact that a worker makes his/her services available to the general public on a regular and consistent basis indicates an independent contractor relationship.
- The right to discharge a worker is a factor indicating that the worker is an employee and the person possessing the right is an employer. An employer exercises control through the threat of dismissal, which causes the worker to obey the employer's instructions. An independent contractor cannot be fired so long as the independent contractor produces a result that meets the contract specifications.
- If the worker has the right to end the worker’s relationship with the person(s) for whom the services are performed at any time the worker wishes without incurring liability, then that also indicates an employer-employee relationship.
None of the 20 factors are determinative of employment status, and there is no presumption that an individual performing services is an employee as there is under the ABC test. Thus, the 20-factor test is more akin to a “totality of the circumstances” approach, rather than focusing on the question of who “controls” the worker’s work as under the ABC and the current seven-factor workers’ compensation test in Tennessee.
Accordingly, Tennessee employers who have entered into work arrangements with individuals other than those who traditionally have been deemed independent contractors (e.g., painters, plumbers, electricians, etc. who only perform work on a sporadic/as needed basis and actually have “painting”, “plumbing” or “electrician” businesses in which they offer these same services to the general public or at least several other entities aside from just the one who is paying them today) should be prepared to review carefully the status of these workers in light of this new 20-factor test. For the one billionth time, “giving someone a 1099 does NOT make them an ‘independent contractor’ under any test.” Did you see that listed as a factor above? No!