Common Law Employment Test: Purpose & Administration

Instructor: Joseph Madison

Joseph received his Doctorate from UMUC in Management. He retired from the Army after 23 years of service, working in intelligence, behavioral health, and entertainment.

This lesson will discuss what the common law employment test is, why it is used, and how it is administered. It will also cover why classification of employees is integral to a business.

Employee or Independent Contractor?

Businesses have two types of workers. First is an employee, which is someone who is hired and can be told every aspect of how to do their job. They are covered by benefits and get vacation and sick time.

The other type of worker is an independent contractor, who is not hired, but agrees by contract to work with the company for either a specific period of time, or a specific job. The business can terminate the contract at any time, and the contractor is solely responsible for how a job gets done.

Contractors are also not provided benefits or vacation/sick days. These are the black and white definitions of these types of workers, but many businesses struggle to determine who is considered an employee, and who is an independent contractor.

That is where the common law employment test comes in. The common-law employment test is a set of rules created by the IRS to determine whether someone is an employee or an independent contractor.


Are you an employee or a contractor?

The common law employment test has three categories:

  • Behavioral - Can the company tell the employee when, how, and where to do the job? If so, then it is likely the individual is an employee, not a contractor.
  • Financial - How is the individual paid? Are they paid a large lump sum and then responsible for purchasing benefits and allocating money for taxes? If they are, then the individual is likely a contractor and not an employee.
  • Relationship Type/Benefits - Does the employee have benefits such as vacation time, medical insurance, and workers comp? Also, is the employee hired with no time limit? If so, then the person is probably an employee and not a contractor.


These three categories are broken down further into 20 different factors/statements. They are simple and require the individual to notate details about their employment.

For example: ''A worker who is required to comply with other persons' instructions about when, where, and how he or she is to work is ordinarily an employee.'' In other words, if your boss outlines the details and the timing of your job, you are a probably an employee.

Another factor is how many hours an individual is required to work. If the requirement is 40 hours, the person is likely an employee, because a contractor is only required to accomplish the job, not work a set number of hours.

A third factor is whether the worker is going to be reimbursed for any type of travel expenses, if so, they are likely an employee. Contractors are required to pay out of pocket for those aspects of a position. Ultimately, employees have a lot of control exerted upon them by the company, while a contractor has freedom.

Classification is Key

The significance of the test is that it can help clarify a workers status, avoid misclassifying a job, and prevent subsequent income tax and benefits issues.

For example, say Hannah was hired as an employee at Company A. Her annual salary is $60,000, she has 2 weeks vacation, and 2 weeks of sick time.

After working at Company A for three months Hannah gets in a severe car accident, and is in the hospital for a week. Although Hannah believed she was covered by sick time and insurance from work, human resources had classified Hannah an independent contractor.

Hannah's boss Barry discusses this issue with HR, and they realize their mistake, but not in time for Hannah to get her sick days, so now Hannah may not be paid for the time she was out sick.

Additionally, because Hannah was classified as an independent contractor, she was not covered by the company's insurance at the time of her injury. Hannah may now be responsible for the full medical bill from the hospital.

Company A now has the liability to pay Hannah's medical bills, and make sure she is paid any time she was authorized to have. They may also have to pay additional funds for the hassle.

This situation can and does happen to employees due to misclassification. However, these are not the only consequences of misclassification.

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