According to the IRS "Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed." The IRS provides the following example:
Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. She works 6 days a week, and is on duty in Bob's showroom on certain assigned days and times. She appraises trade-ins, but her appraisals are subject to the sales manager's approval. Lists of prospective customers belong to the dealer. She has to develop leads and report results to the sales manager. Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. She is paid a commission and is eligible for prizes and bonuses offered by Bob. Bob also pays the cost of health insurance and group-term life insurance for Donna. Donna is an employee of Bob Blue.
The Three Part Test to Determine Employee Status
When determining a worker’s status, you must consider your control over them. If you have great control over the worker, they are probably an employee. To help you examine control, you can use a three-part test from the IRS called common law rules. The three parts are explained below.
- Behavioral control: Do you control or have the right to control what the worker does and how the worker does their job? If so, the worker might be an employee.
- Financial control: Do you control the business aspects of the worker’s job? This includes things like how the worker is paid, whether expenses are reimbursed, and who provides tools and supplies. If you control business aspects, then the worker might be an employee.
- Type of relationship: Are there any written contracts or employee type benefits? These include things like retirement plans, insurance, and vacation and sick pay. Will your relationship with the worker continue? Is the work performed a key aspect of your business? If you answered yes to these things, then the worker might be an employee.
You must consider all three parts of the test. One factor doesn’t weigh more than the others. Also, there is not a set number of factors that a worker needs to meet to be considered an employee. For example, a worker might only meet two parts of the test and still be classified as a common law employee.
What Employees Do
Each employee has a specific job to accomplish that is often defined by a job description. In responsible organizations, a performance development planning process defines the work of the employee and the organization’s expectation’s for the employee’s performance. It should also help employees set goals and track their performance. Additionally, the performance management system should help employees develop their ongoing skills and adopt a career path.
An employee works within a functional area or department such as marketing or Human Resources. An employee has a boss, the person he or she reports to and takes direction from, usually a manager or supervisor. An employee should have the expectation that he or she will receive reasonable, professional treatment from the manager. An employee also has coworkers who work with them to accomplish the work of the department.
The employee has a workstation or an office in which he or she accomplishes the job. The employer supplies the employee with the tools and equipment necessary to perform work such as a computer, telephone, cell phone, laptop, desk, and supplies.
In forward-thinking organizations, the employee receives frequent performance feedback from the manager, rewards and recognition, and a reasonable benefits package.
Employee Vs. Contractor
The IRS discusses several types of non-employees. These are individuals who work for someone else but are not employees. The most common type of non-employee is an independent contractor. Independent contractors are self-employed, and the relationship between the contractor and the employer is technically a relationship between two businesses. For example, if you work as a graphic designer for a company on a per-project basis, you are an independent contractor, not an employee.
The IRS has an intricate system of determining the proper classification for a worker, but most businesses and workers can make the determination themselves. The IRS has common law rules to help guide those determinations. The common laws are broadly broken down into three categories: behavioral factors, financial factors, and the type of relationship.
The courts, on the other hand, have developed three tests to be used in determining a worker’s status: the common-law test, the economic realities test, and a hybrid test that incorporates various elements of both of those tests. Because the tests have been applied to different Federal statutes, the characterization of a worker as an employee or an independent contractor can vary, depending on which statute is being applied. As a result, the same person can be classified as an employee under one test and the relevant Federal laws to which that test is applied, but as an independent contractor under another test and its relevant Federal laws. Furthermore, different tests are applied to the same Federal law, depending on which jurisdiction a case is heard in. However, because each of the tests evaluates the totality of the circumstances behind the employment relationship, the overlap in the tests is substantial. Exhibit 1. offers a brief summary of the three tests.
- Common-law test. The common-law test was developed on the basis of the traditional legal concept of agency, which, in an employment context, consists of a relationship wherein one person (the employee) acts for or represents another (the employer) by the employer’s authority. The common-law test involves the evaluation of 10 factors to determine whether a worker is an employee, with no one factor dispositive, but with the determination centering on who has the right to control the work process. Exhibit 2 shows the 10 factors used in the common-law test.
- Economic realities test. The economic realities test, which is most significantly applied in the context of the Fair Labor Standards Act28 governing minimum-wage and overtime obligations, focuses on the economic relationship between the worker and the employer. A worker is an employee under the test if the worker is economically dependent upon the employer for continued employment. The test examines the nature of the relationship in light of the fact that independent contractors would typically not rely on a sole employer for continued employment at any one time, but would work for, and be compensated by, many different employers, whereas most employees hold a single job and rely on that one employer for continued employment and for their primary source of income. The economic reality test is generally applied to laws whose purpose is to protect or benefit a worker, because courts view the protection of a worker who is financially dependent on a particular employer as important. Because of its broader scope, the economic reality test has a greater likelihood of finding workers to be employees than does the common-law test. Accordingly, a worker could be classified as an employee for the purposes of dealing with one Federal law, such as the Fair Labor Standards Act, but as an independent contractor under another, like FICA. In evaluating whether a worker is an employee under the economic realities test, courts look to the factors listed in Exhibit 3, some of which are similar to those considered under the common-law test.
- Hybrid test. The hybrid test combines elements of the common law test and the economic realities test, in keeping with the accepted view of all courts that the totality of the circumstances surrounding the relationship between worker and employer should be examined to determine whether the worker is an employee or an independent contractor. In practice, the hybrid test considers the economic realities of the work relationship as a critical factor in the determination, but focuses on the employer’s right to control the work process as a determinative factor. The hybrid test is applied frequently in cases brought under Title VII of the Civil Rights Act of 1964, which prohibits employers from discriminating against employees on the basis of race, color, religion, sex, or national origin.
The proper classification of a worker as an employee or independent contractor at the beginning of an employment relationship is important to both employers and workers with respect to their obligations and protections under Federal law. Although the classification does depend on the Federal law being applied, the overriding factor is who has the “right to control” the work process, and the relationship is based upon all of its characteristics, regardless of what label the employer applies to the worker.
Types of Employees
You can hire multiple classifications of workers depending on the needs of your company. Having different types of employees on your team allows you to adjust your staffing needs based on demand. As a business owner, you should understand what differentiates each type of employee so you can stay in line with labor and tax laws. An employee’s classification determines the following:
- Eligibility for overtime pay
- Entitlement to health insurance and other benefits
- Tax status
- Legal protections
While some states have their own labor laws that may influence how you should classify employees, here’s an overview of some common employee classifications:
- Full-time: Full-time employees typically put in 30 to 40 hours a week, or 130 hours per month, according to the IRS. If you have 50 or more full-time employees, you must offer them health benefits or pay a fee to the IRS.
- Part-time: Part-time employees work 30 hours or less. You’re not typically legally obligated to offer benefits to part-time employees, but many companies offer a health plan and days off to retain talent and reward employees. You have the same tax obligations for both part-time and full-time employees.
- Seasonal/temporary: Temporary employees work for an employer for a set period of time or for the duration of a project. If you use a recruitment agency to find and place temporary employees, they usually handle tax withholding. When hiring a temporary or seasonal employee directly, you typically need to pay them directly and take taxes out of their paycheck.
- Exempt: An exempt employee doesn’t have a legal right to overtime pay according to the Fair Labor Standards Act. Exempt employees receive a salary, so they’re paid the same amount regardless of how many hours they work. Exempt employees must earn at least $684 per week.
- Non-exempt: The Fair Labor Standards Act gives non-exempt employees the right to earn the federal minimum wage and overtime pay. Non-exempt employees have to be paid overtime at a rate of at least one and a half times salary for every hour they work over 40 hours each week.
The employee lifecycle refers to a natural progression of phases in the way an employee interacts with your organization. The employee lifecycle consists of six stages:
While this is not the only model out there, the employee lifecycle model is useful because:
- The six stages are easy to distinguish from each other, and fairly universal to all employees;
- These distinguishable stages all have their own associated strategies for building engagement; and
- The fact that the model is a cycle, rather than a linear A-to-B journey, helps in the realization that engagement at each stage has a reinforcing or looping effect on the rest of the stages.
- It has been found that engaging with an outgoing employee at the Separation stage actually has a flow-on effect for the next Attraction and Recruitment stages.
Employee Assistance Program (EAP)
Employee Attitude Survey
Employee Stock Options
Employee Stock Ownership Plan (ESOP)
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- Definition of an Employee IRS.gov
- How is the Employee Status of an Individual determined? Patriot Software
- More About Employees and Their Jobs the balance
- The Difference between an Employee and a Contractor
- Classification Test of a Worker as an Employee or Independent Contractor bls.gov
- What are the Different Types of Employees? Indeed
- What is the employee lifecycle? Enboarder