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Did You Hire an Employee or Independent Contractor? Why It Matters and Why You Don’t Want To Get It Wrong

01.5.2022

By Purple Fox Legal

January 5, 2022

Most employers pour hours of time and effort into their hiring strategy. But, have you considered whether you’re hiring employees or independent contractors? And, does it make a difference either way? (Hint: It makes a difference)

Independent Contractors are Not the Same as Employees

Properly classifying workers as either employees or independent contractors is important for nearly all aspects of a business. The worker classification your new hires fall under can impact:

  • Federal and state taxes that your business owes
  • Whether the worker is entitled to minimum wage and overtime pay
  • Requirements for unemployment insurance
  • FMLA compliance
  • OSHA compliance
  • And more

Getting this classification wrong can result in burdensome financial penalties for your business. If workers are classified incorrectly, your business may be subject to federal tax penalties, back pay, interest on missed taxes, and other penalties under the Tennessee Worker’s Compensation Act.

Are You Hiring Employees or Independent Contractors?

So, how can you know for sure whether your workers are employees or independent contractors? The federal government and each state have enacted their own systems to help you easily determine worker classification. Tennessee recently enacted a new method called the “20 Factor Test” which mimics the system used by the IRS.

Tennessee requires services performed before January 1, 2020 to be analyzed using the former ABC Test to determine worker status, while services performed after January 1, 2020, will be analyzed using the new 20 Factor Test.

The 20 Factor Test

To help you determine whether your workers should be classified as employees or independent contractors, use the official 20 Factor Test for Tennessee. The 20 factors are:

1. Whether instructions are provided

Is the worker required to comply with instructions on when/where or how they are to work?

2. Whether there are training requirements for the position

Does the worker need to be trained by an experienced employee? Are mandatory meetings required for the position?

3. Whether the services are integrated into the business operations

Does the success or continuation of the business depend on the worker’s services? Is the worker granted a certain amount of control?

4. Whether services are personally rendered

Is the worker required to personally deliver the services?

5. Whether or not you are hiring, supervising, and paying

Are you responsible for hiring, supervising, and paying this worker?

6. Whether there is a continuing relationship or not

Is a continuing relationship expected between your business and this worker? Will the work be performed regularly?

7. Whether there are set hours of work

Is the worker expected to perform the services during set hours?

8. Whether full time is required

Is the worker required to devote substantial amounts of time to the business regularly? Is the position so time-demanding that it’s restricting the worker from seeking work elsewhere?

9. Whether work is performed on the employer’s premises

Where are the services performed? Is the worker granted freedom to do the job elsewhere?

10. Whether there is a set order of work

Is the worker free to complete the services in any way they please, or is there a set sequence to get the job done?

11. Whether oral or written reports are submitted

Is the worker required to submit regular reports on their work, the services, or some other aspect of the job?

12. Whether payment is made regularly or not

Is the worker paid on an hourly, weekly, or monthly basis? Is the worker paid in a lump sum for their services?

13. Whether business or traveling expenses are paid for

Are the worker’s business and/or traveling expenses covered?

14. Whether necessary tools and materials are provided or not

Who provided the worker’s tools, materials, or equipment?

15. Whether the worker has significant investments in the business

Did the worker invest in the business facilities they’re using?

16. Whether the worker holds realization of business profits or losses

Can the worker understand the financial implications of their services on the business?

17. Whether the worker has other jobs

Does the worker perform their services for other businesses at one time?

18. Whether the worker’s services are available to the general public

Are other business owners able to hire the worker for their services?

19. Whether there is a right to discharge

Do you possess a right to discharge the worker?

20. Whether there is a right to terminate

Does the worker possess a right to terminate the relationship without incurring liability?

It’s important to remember that not every element in the 20-factor test is given equal weight and none are dispositive, so employers should give each one proper consideration before hiring.

Correct worker classification is vital to comply with state and federal regulations. If you feel unable to determine your worker’s status, consider contacting the Tennessee Department of Labor and Workforce Development or reaching out to an attorney for assistance.