Proper classification of an individual as an "employee" or "independent contractor" is critical. While the ultimate classification is a matter of common law principles as to whether the worker is subject to the control and direction of another only as to the result of his work (an independent contractor) and not as to the means (an employee), the following factors can help to determine the proper classification. Please note that these are for references only and are by no means conclusive:-
1. Instructions to worker - A worker that is subject to instructions about when, where, and how to work is usually an employee.
2. Training - An employee is more likely to be subject to training than an independent contractor.
3. Integration into business operations - The greater the integration of a worker's services into the business, and thus the greater the business' control, tends to reflect an employment relationship.
4. Requirement that services be personally performed - The greater the flexibility given the worker to designate who may perform services favors an independent contractor classification.
5. Hiring, supervising, and paying for a worker's assistants - If the business provides assistants to the worker, as opposed to the worker providing his or her own assistants, this may indicate that the worker is an employee.
6. Continuity of the relationship - Continuing, "on call" or similar long-term relationships, even if part-time, support classification as an employee.
7. Setting the hours of work - An independent contractor usually sets his own work hours.
8. Requirement of full-time work - Independent contractors, unlike employees, do not normally work full-time for one business and are free to work when and for whom they choose.
9. Working on employer premises - If the business requires work to be performed at its offices, this indicates control over the worker (if the work could be done elsewhere).
10. Setting the order or sequence of work - Independent contractors generally enjoy greater freedom to follow their own pattern of work routines and schedules.
11. Requiring oral or written reports - Regularly required oral or written reports usually reflect an employee relationship.
12. Paying worker by hour, week, or month - Employees are normally paid hourly, weekly, or monthly, while independent contractors are usually paid by the job or on a straight commission basis.
13. Payment of worker's business and/or traveling expenses - This factor reflects a business' effort to control its expenses through an employee.
14. Furnishing worker's tools and materials - Employees are normally provided necessary work tools and materials, independent contractors tend to furnish their own.
15. Significant investment by worker - Employees are normally provided the requisite facilities by their employer, while independent contractors usually invest in and maintain their own work facilities.
16. Realization of profit or loss by worker - A worker who can realize a profit or suffer a loss as a result of his services is generally an independent contractor. Of course, some employees may also realize a profit or suffer a loss, as a result of profit sharing plans or investments in the company. In that case, the IRS will examine whether the worker's profit or loss opportunities are different from an employee's.
17. Working for more than one business at a time - Employees usually work for only one company, while independent contractors frequently work for more than one business.
18. Firm's right to discharge worker - An employer exercises control over its employee through the threat of dismissal, while independent contractors normally cannot be dismissed so long as they meet their contractual obligations.
19. Worker's right to terminate relationship- Employees are usually entitled to quit at their leisure, while independent contractors generally must fulfill contractual obligations.
20. Availability of worker's services to the general public - If the worker usually makes himself or herself available to the public to perform services, he or she is more likely an independent contractor.
The penalties for mis-classification under tax and other laws are severe and may, in some cases, create personal liability for the individual that has established the employment relationship or was a responsible party for deducting and withholding contribution to the MPF Scheme. Use caution in making the employee/independent contractor classification, and consult a solicitor for advice.
Other factors should be considered to determine whether an individual should be retrained as an employee or independent contractor. For example, it is much easier to dictate to and control the work of an employee. The employee is usually at the employer's offices throughout the work period and work can be more easily monitored. Also, the employee is more likely to develop some loyalty to the employer and is less likely to leave for another position. However, independent contractors may be freely terminated if the work is not satisfactory. With true independent contractors, there is no cost for employment taxes and fringe benefits.
If you are considering the hiring of one or more individuals to perform services for your business or organization, you should consider the benefits and features involved in making that individual an employee or, alternatively, an independent contractor. Make sure that if you choose to make someone an independent contractor, that he or she is truly not an employee under the law.