Reprinted with the permission of ATX II, LLC www.atxinc.

com

INDEPENDENT CONTRACTOR TESTS

The 20 factors indicating whether an individual is an employee or independent

contractor, set forth in Rev. Rul. 87-41, 1987-1 C.B. 296, are as follows:

(1) INSTRUCTIONS. An employee must comply with instructions about

when, where, and how to work. Even if no instructions are given, the
control factor is present if the employer has the right to control how the
work results are achieved.

(2) TRAINING. An employee may be trained to perform services in a

particular manner. Independent contractors ordinarily use their own
methods and receive no training from the purchasers of their services.

(3) INTEGRATION. An employee's services are usually integrated into the

business operations because the services are important to the success or
continuation of the business. This shows that the employee is subject to
direction and control.

(4) SERVICES RENDERED PERSONALLY. An employee renders

services personally. This shows that the employer is interested in the
methods as well as the results.

(5) HIRING ASSISTANTS. An employee works for an employer who hires,

supervises, and pays workers. An independent contractor can hire,
supervise, and pay assistants under a contract that requires him to
provide materials and labor and to be responsible only for the results.

(6) CONTINUING RELATIONSHIP. An employee generally has a

continuing relationship with an employer. A continuing relationship may
exist even if work is performed at recurring although irregular intervals.

(7) SET HOURS OF WORK. An employee usually has set hours of work
established by an employer. An independent contractor generally can set
her own work hours.

(8) FULL-TIME REQUIRED. An employee may be required to work or be

available full-time. This indicates control by the employer. An independent
contractor can work when and for whom he chooses.

(9) WORK DONE ON PREMISES. An employee usually works on the

premises of an employer or works on a route or at a location designated
by an employer.
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OBSERVATION: Factors 7, 8, and 9 may have become of less importance

in view of computers and the internet that allow workers to perform just as
well, and may be even better, away from the workplace.

(10) ORDER OR SEQUENCE SET. An employee may be required to

perform services in the order or sequence set by an employer. This shows
that the employee is subject to direction and control.

(11) REPORTS. An employee may be required to submit reports to an

employer. This shows that the employer maintains a degree of control.

(12) PAYMENTS. An employee is generally paid by the hour, week, or

month. An independent contractor is usually paid by the job or on a
straight commission.

(13) EXPENSES. An employee's business and travel expenses are

generally paid by an employer. This shows that the employee is subject to
regulation and control.

(14) TOOLS AND MATERIALS. An employee is normally furnished

significant tools, materials, and other equipment by an employer.

(15) INVESTMENT. An independent contractor has a significant

investment in the facilities she uses in performing services for someone
else.

(16) PROFIT OR LOSS. An independent contractor can make a profit or

suffer a loss.

(17) WORKS FOR MORE THAN ONE PERSON OR FIRM. An

independent contractor is generally free to provide his services to two or
more unrelated persons or firms at the same time.

(18) OFFERS SERVICES TO THE GENERAL PUBLIC. An independent

contractor makes his services available to the general public.

(19) RIGHT TO FIRE. An employee can be fired by an employer. An

independent contractor cannot be fired so long as he produces a result
that meets the specifications of the contract.

(20) RIGHT TO QUIT. An employee can quit her job at any time without
incurring liability. An independent contractor usually agrees to complete a
specific job and is responsible for its satisfactory completion or is legally
obligated to make good for failure to complete it.
 Reprinted with the permission of ATX II, LLC www.atxinc.com

The IRS has shifted the focus away from the 20-factor analysis and more toward
an analysis of behavioral control factors, financial factors and relationship of the
parties.

1. Behavioral Control Factors:

Facts that illustrate whether there is a right to direct or control how the worker
performs the specific task for which he is engaged include (1) instructions and (2)
training.

Instructions. Regarding instructions, the Training Manual observes that virtually

every business will impose on workers -- whether independent contractors or
employees -- some form of instruction (for example, requiring that the job be
performed within specified time frames). According to the Training Manual, this
fact alone is not sufficient evidence to determine the worker's status. As with
every relevant fact, the goal is to determine whether the business has retained
the right to control the details of a worker's performance or instead has given up
its right to control those details. Accordingly, the weight of instructions in any
case depends on the degree to which instructions apply to how the job gets
done, rather than to the end result. Instructions about how to do the work may
cover a wide range of topics, such as:

- when to do the work;

- where to do the work;

- what tools or equipment to use;

- what workers to hire to assist with the work;

- where to purchase supplies or services;

- what work must be performed by a specified individual (including ability

to hire assistants);

- what routines or patterns must be used; and

- what order or sequence to follow.

The requirement that a worker obtain approval before taking certain actions is an
example of instructions.

Generally, the more detailed the instructions to the worker, the more control the
business exercises over the worker, and the more likely the business retains the
 Reprinted with the permission of ATX II, LLC www.atxinc.com

right to control the methods by which the worker performs the work. Absence of
detail in instructions reflects less control.

Training. According to the Training Manual, training is a classic means of

explaining detailed methods and procedures to be used in performing a task.
Periodic or on-going training provided by a business about procedures to be
followed and methods to be used indicates that the business wants the services
performed in a particular way. This type of training is strong evidence of an
employer-employee relationship. However, not all training rises to this level.
According to the Training Manual, the following types of training, which might be
provided to either independent contractors or employees, should be disregarded:

- orientation or information sessions about the business's policies, new

product line, or applicable statutes or government regulations; and

- programs that are voluntary and are attended by a worker without

compensation.

2. Financial Control:

Facts that illustrate whether there is a right to direct or control how the business
aspects of the worker's activities are conducted include (1) significant investment;
(2) unreimbursed expenses; (3) services available to the relevant market; (4)
method of payment; and (5) opportunity for profit or loss. The question is whether
the recipient has the right to direct and control business-related means and
details of the worker's performance.

Significant Investment. A significant investment is evidence that an independent

contractor relationship may exist. However, a significant investment is not
necessary for independent contractor status, because some types of work do not
require large expenditures. Even if large expenditures (such as costly equipment)
are required, an independent contractor may rent the equipment needed at fair
rental value.

There are no precise dollar limits that must be met in order to have a significant
investment. However, the investment must have substance. Further, as long as
the worker pays fair market or fair rental value, the worker's relationship to the
seller or lessor is irrelevant. The size of the worker's investment and the risk
borne by the worker are not diminished merely because the seller or lessor
receives the benefit of the worker's services.

Unreimbursed Expenses. The extent to which a worker chooses to incur

expenses and bear their costs affects the worker's opportunity for profit or loss.
This constitutes evidence that the worker has the right to direct and control the
financial aspects of the business operations. Although not every independent
contractor need make a significant investment, almost every independent
 Reprinted with the permission of ATX II, LLC www.atxinc.com

contractor will incur an array of business expenses either in the form of direct
expenditures or in the form of fees for pro rata portions of one or several
expenses. These may include:

- rent and utilities;

- tools and equipment;

- training;

- advertising;

- payments to business managers and agents;

- wages or salaries of assistants;

- licensing/certification/professional dues;

- insurance;

- postage and delivery;

- repairs and maintenance;

- supplies;

- travel;

- leasing of equipment;

- depreciation; and

- inventory/cost of goods sold.

Services Available. An independent contractor is generally free to seek out

business opportunities. Indeed, the independent contractor's economic prosperity
depends on doing so successfully. As a result, independent contractors often
advertise, maintain a visible business location, and are available to work for the
relevant market.

Ability to Realize a Profit. According to the Training Manual, the ability to realize
a profit or incur a loss is probably the strongest evidence that a worker controls
the business aspects of services rendered. If the worker is making decisions that
affect his bottom line, the worker likely has the ability to realize profit or loss.
Examples include decisions regarding the types and quantities of inventory to
acquire, the type and amount of monetary or capital investment, and whether to
 Reprinted with the permission of ATX II, LLC www.atxinc.com

buy or lease premises or equipment. Employees can also make these decisions,
but the decisions do not usually affect the employee's bottom line.

3. Relationship of the Parties

Facts that illustrate how the parties perceive their relationship include (1) intent of
parties/written contracts; (2) employee benefits; (3) discharge/termination; and
(4) regular business activity.