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)
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:
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.
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.
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:
Is the worker required to comply with instructions on when/where or how they are to work?
Does the worker need to be trained by an experienced employee? Are mandatory meetings required for the position?
Does the success or continuation of the business depend on the worker’s services? Is the worker granted a certain amount of control?
Is the worker required to personally deliver the services?
Are you responsible for hiring, supervising, and paying this worker?
Is a continuing relationship expected between your business and this worker? Will the work be performed regularly?
Is the worker expected to perform the services during set hours?
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?
Where are the services performed? Is the worker granted freedom to do the job elsewhere?
Is the worker free to complete the services in any way they please, or is there a set sequence to get the job done?
Is the worker required to submit regular reports on their work, the services, or some other aspect of the job?
Is the worker paid on an hourly, weekly, or monthly basis? Is the worker paid in a lump sum for their services?
Are the worker’s business and/or traveling expenses covered?
Who provided the worker’s tools, materials, or equipment?
Did the worker invest in the business facilities they’re using?
Can the worker understand the financial implications of their services on the business?
Does the worker perform their services for other businesses at one time?
Are other business owners able to hire the worker for their services?
Do you possess a right to discharge the worker?
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.