Properly Classify Workers to Avoid Litigation – IRS 20 Factor Test

Employment litigation is a fast growing area of practice in the State of California. I believe this is largely due to the fact that attorneys’ fees and costs are recoverable by workers who employers failed to comply with California’s wage and hour laws. In other words, plaintiff’s lawyers are highly motivated to find even a nominal amount of unpaid wages because they know that they stand to profit greatly if employers fight their claims.

While many business owners see the short term cost savings to be had by paying workers as independent contractors, they fail to take into account the inevitable litigation costs related to lawsuits from workers, which greatly outweigh any savings they may have realized. Back wages, penalties, interest and attorneys’ fees and costs can snowball quickly into tens or even hundreds of thousands of dollars.

To properly classify workers, business owners need to take into account the various tests created by the Internal Revenue Service, the California Employment Development Department, and California state and federal courts. Below, I outline the IRS 20 Factor Test, which was developed by the IRS to identify factors relevant in determining whether an employee-employer relationship exists. Each case is evaluated on a case-by-case basis based on the totality of the circumstances. The degree of importance of each factor varies depending on the occupation and factual context. The factors are as follows:

1. Instruction – whether the worker is required to follow instruction.
2. Training – whether the commissioning party trains the worker.
3. Integration – whether services are integrated into the business.
4. Personal – whether services must be performed personally.
5. Assistant – whether commissioning party supplies assistants to the worker.
6. Continuity – whether the relationship is recurring.
7. Hours of Work – whether the commissioning party sets the working hours.
8. Time Required – whether commissioning party determines when the worker will work.
9. Work Location – where the work is performed.
10. Sequence of Work – whether the commissioning party establishes a sequence.
11. Reports – whether the worker is required to report to the commissioning party.
12. Payments – on what basis the working party is paid.
13. Expenses – whether reimbursements are made for expenses.
14. Tools and Materials – whether the commissioning party provides tools and materials.
15. Facility Investment – whether the worker is dependent on the commissioning party’s facilities.
16. Profit or Loss – whether the worker is capable of realizing a profit or loss.
17. Simultaneous Work – whether a worker can perform services simultaneously.
18. General Public – whether services are available to the general public, independently.
19. Discharge – whether the commissioning party can fire the worker.
20. Termination – whether the worker can quit at any time.