The 7 Factor Test In Ewens & Miller, Inc. v. Commissioner , the US Tax Court focused on 7 factors (which incorporate some of the 20 factors) as being dispositive, (1) The degree of control the principal exercised; (2) which party invests in work facilities the worker used; (3) the worker's opportunity for profit or loss; (4) whether the principal can discharge the worker; (5) whether the work is part of the principal's regular business; (6) the permanency of the relationship; and (7) the relationship the parties believed they were creating. This case is often cited in more recent cases which may suggest that most court may focus on these seven factors. Of the seven factors number seven seems to be trumped by the regulations when ever the requisite degree of control is found. In fact, courts often cite the degree of control as the "crucial test" to determine the existence of the employer employee relationship . Requisite Degree of Control The Treasury Regulations state that an employer employee relationship may exist where the employer has the right to control the details, manner and method of the individual's work . It is the "right to control" rather than actual control which is determinative . So it is not necessary for the employer to be in the physical presence of the employee directing, each and every detail of the employee's work. In contrast, where an independent contractor relationship exists, the employer is interested only in the results of the work. The employer abdicates the right to control the details, manner and method of the contractor's work, hours worked and location of the work. . Investment in Facilities The second factor enunciated above compare favorable to factors 14 and 15 of Rev. Rul.87-41. Where there is a lack of investment in the tools of the trade or the facilities where the work is performed by worker actually performing the services, this is more indicative of an employer-employee relationship. By contrast if the service provider provides his or her own tools, materials, equipment, transportation, etc. or owns or leases property out of which he or she offers services to the public at large an independent contractor relationship might be found. Thus degree of the dependency of the worker performing the services on the person requesting the services to accomplish the work will help define the proper relationship. Opportunity for Profit or Loss If the person performing the requested services assumes the risk of generating a profit or loss on the work they perform, this would be one indication that an independent contractor relationship exists . In contrast receipt of a fixed salary or the payment for services at an hourly rate indicates an employer employee relationship . The Right to Terminate the Relationship In an independent contractor relationship the person requiring the services is expecting a result. The early termination of the relationship by either the person requesting or providing the services could lead to a breach of contract action resulting in damage awards or equitable remedies for one or both sides. In an employer-employee relationship both parties generally have the right to terminate the relationship with or without notice . Rights to damages as a result of the termination of the relationship are typically based on labor laws and not contract law, unless an employment contract is in force or implied. Integral Part of Regular Business The 3rd factor of the 20 factors of Rev. Rul 87-41 provides that, "[i]ntegration of the worker's services into the business operations generally shows that the worker is subject to direction and control. When the success or continuation of a business depends to an appreciable degree upon the performance of certain services, the workers who perform those services must necessarily be subject to a certain amount of control by the owner of the business." This is also a key part of the 7 factor test. If a business continually relies on the services of the person performing the services to achieve operational success then it is likely that an employer-employee relationship exists. This can be contrasted with an independent contractor relationship where a specific result rather than a continuing, directed goal is expected by the person requesting the services. In the independent contractor relationship there is a temporary nexus with the company. In the employer-employee relationship there is an implied permanence of the relationship coupled with the ability to direct the relationship and the result by the employer. Permanence of the Relationship The duration of the relationship intended by the parties will have an impact on the relationship created . Where the intention of the parties is to create a temporary relationship to achieve a specific objective it is likely that an independent contractor relationship exists . On the other hand, where a continuing relationship is contemplated and one party exercises or has the right to control the relationship an employer-employee relationship is indicated . Intent of the Parties The last of the factors is the intention of the parties. Whether the parties intend to create an employer-employee or independent contract relationship will be determined by all of the facts. Substance over form will come into play. The intention of the person requesting the services to avoid the creation of an employer-employee relationship by entering into a contract that states that an independent contractor relationship is intended is not dispositive. While the parties may into an agreement which takes the form of an independent contractor arrangement, this intended relationship will be ignored where the substance of the relationship based on the facts is one of employer-employee. Thus if the facts of the relationship as applied against the guidance of the 7 factor and/or 20 factor test indicate that an employer-employee relationship exist, then the relationship will follow that form.
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