Common-Law Test in HR
What Is the Common-Law Test in hr?
The common-law test in hr refers to the requirements within a human resource department’s policies, procedures, and practices. The common-law test in hr is in accordance with traditional legal standards and requirements that historically have been applied to hiring decisions.
The common-law test in hr assumes that all final decisions related to hiring are political in nature and are subject to compromise and negotiation. All hiring decisions within the common-law test in hr must be approved by the board of directors, and these decisions cannot be made on the president’s or CEO’s authority.
What Are the 3 Factors in the IRS Common-Law Test?
There are three key factors in the Common-Law Test that determine whether a worker is an employee:
- Behavioral Control
components determine behavioral control:
- Types of instructions given: If a business gives instructions on how, when, and where a worker should perform their work (what tools/equipment to use, what specific work must be done, what order/sequence the work must follow, etc.), the individual is likely an employee.
- Amount of instructions: The more detailed the instructions, the more control a business has over the worker. Therefore, a large degree of instructions would imply the individual is an employee.
- Evaluation system: If there is an evaluation system that measures work performance, this would specify the worker is an employee. But if the evaluation simply judges the end result, they can either be an employee or an independent contractor.
- Training: If the business trains the worker on how to do their job, this indicates an individual is an employee (the business wants the job done a particular way). An independent contractor is free to execute their job duties using their own process.
2. Financial Control
Does the business have control over the financial aspects of the worker’s job? The more financial control it has, the more likely it is that the worker is an employee rather than an independent contractor.
determine a worker’s classification:
- Significant investment: Though there are no specific dollar amounts a worker must meet to signify they are making a “significant investment,” independent contractors generally invest a lot more in the tools/resources they use than employees do.
- Unreimbursed expenses: The extent to which workers incur unreimbursed expenses can indicate whether they are an employee or independent contractor. Independent contractors are likely to have more unreimbursed expenses than employees. But businesses should be careful not to base their decision on this factor, as employees can also incur unreimbursed expenses.
- Opportunity for profit or loss: The more profit a worker makes, the more likely it is that they are an employee. And the more losses they incur, the more likely it is that they are an independent contractor.
Say a worker invests quite a bit into their tools/resources and incurs unreimbursed expenses. They would have a greater possibility of incurring losses rather than profit. This would indicate they are an independent contractor.
- Services available to the market: Independent contractors are free to seek out business opportunities. They usually have their services advertised in the market to stay in business. Employees generally need to refer to their company policy on operating a side business and may need to discuss this with their employer.
- Method of payment: Independent contractors are usually paid a flat fee for the job or paid on an hourly basis. Employees are generally guaranteed a wage or salary amount for a period of time. Even when someone’s wage/salary is supplemented by a commission, they would still be considered an employee.
3. Type of Relationship
What kind of relationship exists between the business and the worker? There are four categories to consider to help classify your worker:
- Written contracts: The contract should state how both parties—the business and the worker—work together. This determines the worker’s status. A contract stating whether someone is an employee or independent contractor is not adequate enough to determine a worker’s classification.
- Employee benefits: Benefits like health insurance, paid time off, and sick days are generally offered to employees but not independent contractors.
- Permanency of the relationship: Employees are often hired for an indefinite period of time, while independent contractors are usually hired for a specific time period or project.
- Services provided: A worker who offers services that are central to the business is more likely under the direct control of the company. This would, therefore, indicate an employer-employee relationship.