A common law employee is defined by the IRS as anyone who performs a service for your business if you control what is done and how it is done. Common law employees may still be given some freedom to perform their duties as they see fit, but they are still subject to the direct authority of an employer.
Common Law Employee Factors:
The IRS notes three factors that must be considered in order to determine if someone is a common law employee rather than an independent contractor:
1. Behavioral: The company has the right to control the employee's work and how it is done.
2. Financial: The worker's compensation is controlled by the business, i.e. the worker is not setting the rate of pay or submitting invoices/bills to the business for their services.
3. Type of Relationship: Several elements are important here, such as the presence of a written contract, the payout of benefits to the worker, the intended continuation of the relationship, etc.
Businesses can use these factors to determine if a worker is an employee or an independent contractor. If the proper designation is still unclear, a business can file Form SS-8. Form SS-8 is a request for a case review and an official determination from the IRS.
Why Does Common Law Employee Status Matter?
Misclassification of an employee as an independent contractor could result in your business being held liable for whatever employment taxes should have been paid for that worker. Employees are often entitled to vacation pay and benefits, so failing to meet federal or state labor laws could land your business in serious legal trouble.
Employers are also required by law to withhold several types of taxes from their employees' paychecks, including:
- Federal income tax.
- Social security tax.
- Medicare tax.
- Federal unemployment tax.
- Applicable state taxes.
The IRS provides further information on common law employees here.
Can an owner be a common law employee?
An owner can be a common law employee if the company has control over what they are working on and how they are working on it. However, an owner who is totally autonomous is not a common law employee.
What is the common law test?
There is no set test for common law employment. Instead, the IRS prescribes three factors, (behavioral, financial, and type of relationship) to help businesses decide whether a worker is an employee or an independent contractor.
What is common law reasonable notice?
There is no specified timeline for reasonable notice of termination in regards to common law employment. Either party has the right to end the employment relationship, provided that they provide "reasonable" notice. Generally, what is reasonable is defined by the duration of employment.
What are the common law duties of an employee?
- Fulfill term of employment.
- Work diligently in the capacity that is assigned.
- Cooperate with the employer.
- Perform all duties with care and diligence.
- Account for all money/property received from the business.
- Indemnify the employer, when appropriate.
- Keep privileged information in confidence.
What is a common law contract of employment?
A common law contract of employment is a written contract that outlines the terms and expectations of a common law employment relationship.
Do common law rules determine the relationship between an employer and employees?
In some companies, common law employees are still given lots of room to perform their duties as they see fit. However, it is still a common law employment situation if the company has the right to tell the worker how to do their job.
Is it legal to 1099 an employee?
Form 1099 is used for independent contractors, who don't fall under the category of common law employment.