What are the three legal tests for determining whether or not a worker should be classified as an employee of a company?
The Definition of "Employee"
Courts have offered various ways to determine whether a worker is an employee. Generally, the interpretation used depends on the factual circumstances presented by each case, as well as which law is at issue.
Common-law agency test
A test used to determine employee status; though it considers several factors, the most critical is whether the employer has the right or ability to control the work. Under the common-law agency approach applied by the courts, the employer need not actually control the work, but must merely have the right or ability to control the work for a worker to be classified an employee. Although this is a strong indication that the worker is an employee, other factors usually are considered. For example, sometimes the courts will review whether the worker is paid in standard wages or through an expectation of profit based on the price the worker "charges" for the job. The common-law test is specifically and consistently used to determine employee status in connection with employment taxes (e.g., FUTA and FICA), as well as in federal income tax withholding.
IRS 20-factor analysis
A list of 20 factors to which the IRS looks to determine whether someone is an employee or an independent contractor. The IRS compiled this list from the results of judgments of the courts relating to this issue. Notwithstanding its own disclaimer, the following 20 factors have been continually articulated by courts, regulatory agencies, commentators, and scholars as critical to the determination of the status of an individual worker. Suffice it to say that, when these factors are satisfied, courts are more likely to find "employee" status. In addition, the IRS stated that these 20 factors are not inclusive but that "every piece of information that helps determine the extent to which the business retains the right to control the worker is important." (See Exhibits 1.3, "Employee or Independent Contractor?" and 1.4, "Internal Revenue Service 'Independent Contractor or Employee?' Publication 1779.")
Economic realities test
A test to determine whether a worker qualifies as an employee. Courts use this test to determine whether a worker is economically dependent on the business or is in business for himself or herself. To apply the test, courts look to the degree of control exerted by the alleged employer over the worker, the worker's opportunity for profit or loss, the worker's investment in the business, the permanence of the working relationship, the degree of skill required by the worker, and the extent the work is an integral part of the alleged employer's business.
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Which legal test makes the most economic and legal sense in your opinion as regards Karen and You Decide Problem?