Employee or Contractor? Deciphering the Impact of Commission-Based Payment Structure
When I’m considering whether someone is an employee or a contractor, does it matter if they’re paid strictly on commission?
Whether someone is paid on commission doesn't necessarily determine whether they are an independent contractor or an employee. The classification of an individual as an employee or an independent contractor is based on multiple factors, and this must be evaluated on a case-by-case basis.
In general, individuals are considered employees when their employer has the right to control the way they perform their work, not just the results of the work. On the other hand, independent contractors usually have more control over their own work, their work hours, and they often provide their own tools and equipment.
The U.S. Internal Revenue Service (IRS) uses a common-law test that involves 20 factors to help define whether a worker is an independent contractor or an employee. Some key factors the IRS considers include:
Level of Instruction: If the company directs when, where, and how work is done, this suggests a possible employer-employee relationship.
Training: If the company provides training about procedures and methods, this suggests the company wants the work done a certain way, and this indicates an possible employer-employee relationship.
Control Over Finances: If the company controls the business aspects of the worker's job, like how the worker is paid, whether expenses are reimbursed, and who provides tools and supplies, this indicates a possible employer-employee relationship.
In addition, the U.S. Department of Labor (DOL) also has a test to help determine the status of a worker, which focuses more on the economic realities of the worker's relationship with the employer.
It's very important to correctly classify a worker, because the classification has implications for things like minimum wage, overtime pay, employee benefits, employment taxes, and liability for workplace accidents.
If you are uncertain of the right classification, you should consult with an employment law attorney or tax advisor to clarify and avoid potential legal and tax liabilities.