Employee vs. independent contractor
According to the IRS, an employee is anyone who performs services for an employer if the employer can control what will be done and how it will be done. This was codified in revenue ruling 87-41, and is generally called "the twenty factor test". [3][4][5] Independent contractors are defined so if the payer or employer has the right to control or direct only the result of the work done, and not the means and methods of accomplishing the result. There are also other categories such as non-employees, which include direct sellers.[6]
http://www.edd.ca.gov/pdf_pub_ctr/de38.pdf
Legislation in South Africa almost a ditto and I reckon in Aussie pretty much the same "test" criteria
Here [South Africa] Bethel was found to be non-compliant in its definition that they were volunteers who had signed the Oath of Poverty / Order of FTS etc and so they have to be signed on as Employees !
As per South African labour legislation:
Employee or independent contractor?
- a.Dominant impression test:
In order to assist with the distinction between an employee and an independent contractor, the courts have formulated a number of tests, the dominant impression test which was accepted by the Labour Appeal Court in SABC v McKenzie:
Some of the important characteristics of the contract of employment and the contract of work, respectively, are:
- i.The object of the contract of service is the rendering of personal services by the employee to the employer. The services are the object of the contract. The object of the contract of work is the performance of a certain specified work or the production of a certain specified result.
- ii.According to a contract of service the employee will typically be at the beck and call of the employer to render his personal services at the behest of the employer. The independent contractor, by way of contrast, is not obliged to perform the work himself or to produce the result himself, unless otherwise agreed upon. He may avail himself of the labour of others as assistants or employees to perform the work or to assist him in the performance of the work.
- iii.Services to be rendered in terms of a contract of service are at the disposal of the employer who may in his own discretion subject, of course, to questions of repudiation decide whether or not he wants to have them rendered. The independent contractor is bound to perform a certain specified work or produce a certain specified result within a time fixed by the contract of work or within a reasonable time where no time has been specified.
- iv.The employee is subordinate to the will of the employer. He is obliged to obey the lawful commands, orders or instructions of the employer who has the right of supervising and controlling him by prescribing to him what work he has to do as well as the manner in which it has to be done. The independent contractor, however, is notionally on a footing of equality with the employer. He is bound to produce in terms of his contract of work, not by the orders of the employer. He is not under the supervision or control of the employer. Nor is he under any obligation to obey any orders of the employer in regard to the manner in which the work is to be performed. The independent contractor is his own master.
- v.A contract of service is terminated by the death of the employee whereas the death of the parties to a contract of work does not necessarily terminate it.
- vi.A contract of service terminates on expiration of the period of service entered into while a contract of work terminates on completion of the specified work or on production of the specified result.
- b.Additional criteria to assist in determining the true relationship between the parties:
- i.The contract itself:
Will usually state the intention of the two parties to the contract - meaning whether it is intended to be an employer/employee relationship or an independent contractor relationship? The courts will not simply accept a contract at face value. They will investigate the true nature and realities of the relationship, and will not bind themselves to what the parties have chosen to call the relationship.
Therefore, despite the fact that the contract may emphasise throughout that the relationship is that of an independent contractor, the courts will not simply accept that at face value. They will dig much deeper.
- ii.The entrepreneurial nature of self-employment:
The courts will examine the aspects of where the person appears to be a truly independent contractor, performing services for clients. Usually, an independent contractor will have an established business, such as a close corporation. He will have one or more clients on his books, and he himself takes the risk of profit and loss in his business.
An employee, on the other hand, is entirely economically dependent on the person for whom he is performing his services.
- iii.The risk of profits and losses:
A person who is an employee will not normally, or is unlikely to, invest money into the business of his employer, and be liable if the business crashes. However, many companies do have profit-sharing or profit-based bonuses for the employees. A person who is an independent contractor would certainly invest money in the equipment and resources of his own business.
- iv.The personal nature of services:
The employee renders his services personally to the employer. An employee would not send other people to the employer to provide the services that the employee has agreed to personally provide. In addition, the employer would probably not allow this. Generally, an independent contractor does not have to carry out the delivery of the agreed end result himself - he can use his employees to do that.
- v.Taxation:
- An employer is obliged by law to deduct tax from the earnings of his employees. He does not have the same obligation with respect to independent contractors. The independent contractor is responsible for his own tax liability. Thus, deduction of PAYE or SITE tax is a strong indicator of an employee/employer relationship. There may be exceptions to the rule - where an employee can elect to be responsible for his own tax liability or an independent contractor may prefer the client to deduct tax from his invoice. Such arrangements do exist.
