DENEWETH, DUGAN & PARFITT 1175 W. Long Lake Rd., Ste. 202, Troy, MI 48098
From the desk of Chris Parfitt
(248) 290-0400 firstname.lastname@example.org www.michiganconstructionlaw.net
EMPLOYEE OR INDEPENDENT CONTRACTOR?
Not knowing the difference between the definition of Employee and Independent Contractor can lead to back
taxes (income tax withholding, social security, Medicare tax and unemployment tax), penalties, costly workers
compensation audits, and litigation. The Internal Revenue Service publishes guidelines on how to avoid these
minefields. The IRS focuses on three criteria: Behavioral Control; Financial Control; and Type of Relationship.
In addition, the IRS uses a settlement program identified as the Voluntary Classification Settlement Program
(VCSP). Pursuant to the program, Employers who have misclassified their workers as independent contractors
have the opportunity to reclassify those workers as employees on favorable terms. In other words, there is an
opportunity to make minimal payments toward past payroll taxes that should have been paid.
For purposes of doing business in Michigan, as of January 1, 2013, there is a new statute which uses a 20
factor test to determine if an employer/employee relationship exists for workers’ compensation liability. The 20
factors, which originated with the IRS, are as follows:
1. INSTRUCTIONS regarding when, where, and how a worker is to complete their tasks – Employee.
2. TRAINING provided to the worker – Employee.
3. INTEGRATION of worker's services into business operations – Employee.
4. SERVICES RENDERED PERSONALLY by the worker – Employee.
5. HIRING, SUPERVISING & PAYING ASSISTANTS - If the persons for whom services are performed
hire and pay assistants, that is indicative of an employer/employee relationship. If the worker hires,
pays and supervises assistants, that is indicative of an independent contractor relationship.
6. CONTINUING RELATIONSHIP between worker and the persons for whom services are rendered.
There may be a continuing relationship where work is performed at frequently occurring but irregular
intervals – Employee.
7. SET HOURS OF WORK - The persons for whom services are rendered establishes set hours for the
worker – Employee.
8. FULL TIME REQUIRED - The worker must substantially devote their full time to the persons for whom
services are rendered (impliedly limiting the worker’s ability to work for others) – Employee.
9. WORKING ON EMPLOYER'S PREMISES - especially if the work could be done elsewhere –
10. ORDER OR SEQUENCE SET BY EMPLOYER - The employer sets or dictates the sequence of work
tasks performed. This can be shown if the employer retains the right to set the order or sequence of
work tasks performed – Employee.
11. ORAL OR WRITTEN REPORTS required by employer – Employee.
12. PAYMENT BY THE HOUR, WEEK OR MONTH – Employee.
13. PAYMENT OF BUSINESS AND/OR TRAVEL EXPENSE by employer – Employee.
14. FURNISHING OF TOOLS AND MATERIALS (employer furnishes significant tools & materials) –
15. SIGNIFICANT INVESTMENT in facilities by worker that are not normally maintained by employees is
indicative of an independent contractor. The lack of investment by the worker is indicative of an
16. REALIZATION OF PROFIT OR LOSS - A worker who can realize a gain or loss as a result of their
services is generally an independent contractor, but a worker who cannot is generally an employee.
17. WORKING FOR MORE THAN ONE FIRM AT A TIME – Independent Contractor.
18. MAKING SERVICES AVAILABLE TO GENERAL PUBLIC (on a regular and consistent basis) –
19. RIGHT TO DISCHARGE at will by employer - Employee. Termination of an independent contractor is
usually based on the contract.
20. RIGHT TO TERMINATE by worker without liability – Employee.
If an employer hires an independent contractor, the employer should request a copy of the contractor’s
certificate of insurance for workers’ compensation.
Recently, the IRS has attempted to simplify the guidelines and has consolidated the twenty factors into eleven
main tests and has organized them into the three main groups: Behavioral Control, Financial Control, and the
Type of Relationship of the Parties.
Employers can contact the IRS and fill out form SS-8 – “Determination of Employee Work Status for Purposes
of Federal Employment Taxes and Income Tax Withholding”. However, some employers use the form only for
a self-audit and do not actually ask the IRS for a determination. The IRS may have a tendency to classify the
worker as an employee if there is any doubt.
The consequences of misclassifying an employee as an independent contractor can be severe. Thus, a self-
audit is wise.
Chris Parfitt, Attorney
Deneweth, Dugan & Parfitt, P.C.
1175 W. Long Lake Rd., Ste. 202
Troy, MI 48098
(248) 290-0400 (phone)
(248) 290-0415 (fax)