Common-Law Test

What Is the Common-Law Test?

The Common-Law Test is a set of guidelines used by the IRS that classifies workers as either employees or independent contractors.

The test measures how much behavioral and financial control an employer has over an individual and the type of relationship both parties share. A worker who meets the guidelines of the Common-Law Test is considered to be an "employee.”

Employee vs. Independent Contractor

Though a business can hire and pay both employees and independent contractors, there are important legal differences between the two:

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What Are the 3 Factors in the IRS Common-Law Test?

There are three key factors in the Common-Law Test that determine whether a worker is an employee:

1. Behavioral Control

Are there facts that illustrate an employer’s right to direct or control how the worker should conduct their work?

According to the IRS guidelines, four components determine behavioral control:

2. Financial Control

Does the business have control over the financial aspects of the worker’s job? The more financial control it has, the more likely it is that the worker is an employee rather than an independent contractor.

There are five financial control factors that determine a worker’s classification:

Say a worker invests quite a bit into their tools/resources and incurs unreimbursed expenses. They would have a greater possibility of incurring losses rather than profit. This would indicate they are an independent contractor.

3. Type of Relationship

What kind of relationship exists between the business and worker? There are four categories to consider to help classify your worker:

What Are Right-to-Control Tests?

Common-Law Tests are also commonly called the Right-to-Control Tests. They are collective balancing tests that decipher whether a business has the right to control what the worker does and how they should do their work.

Why Is Employee Classification Important for Employers?

Employee classification is essential because it affects the taxes and reports businesses and workers submit to federal and state governments.

For example, employees are generally required to receive a W-2 form and independent contractors are required to receive Form 1099-MISC to file their tax returns. Misclassifying your workers can result in financial penalties from the IRS.

Moreover, employee classification can determine the kinds of pay and benefits the worker is entitled to. For example, a business might pay employees a salary but pay independent contractors on an hourly or per-project basis.