Employee or Independent Contractor?

The determination of whether an individual is an employee or independent contractor is important for several reasons for Missouri unemployment tax purposes.

• Under Missouri law, wages paid to employees are subject to employment taxes paid by the employer.
• Only compensation paid to employees is used to calculate unemployment benefits for that employee should he or she become unemployed through no fault of their own.

If an employer has individual(s) performing services in connection with its business operations who are not considered employees, the employer has the responsibility to contact the Division for a ruling on the workers' employment status.

Any agreement by an individual to waive rights to unemployment insurance coverage is void under the Missouri Employment Security Law.

Worker classification is based upon a common law standard for determining whether a worker is an independent contractor or employee. Common law is the body of law developed primarily from judicial decisions based on custom and precedent, unwritten in statute or code. Following the common law standard, the employment tax regulations provide that an employer-employee relationship exists when the business for which the services are performed has the right to direct and control the worker who performs the services. This control refers not only to the result to be accomplished by the work but also the means and details by which that result is accomplished. In other words, a worker is subject to the will and control of the business not only as to what work shall be done but also how it shall be done. It is not necessary that the business actually direct or control the manner in which the services are performed; it is sufficient if the business has the right to do so.

In an employer-employee relationship, it makes no difference how it is labeled. The substance of the relationship, not the label, governs the worker's status. To determine whether the control test is satisfied in a particular case, the facts and circumstances must be examined. Questions about the relationship between the worker and the business are asked to ascertain the degree of control.

Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties, as shown below.

Behavioral control. Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of:

• Instructions the worker receives concerning the work. An employee is generally subject to the employer's instructions about when, where, and how to work. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved.
• Training the worker is given. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.

Financial control. Facts that show whether the business has a right to control the financial aspects of the worker's job include:

• The extent to which the worker has unreimbursed business expenses. If expenses are not reimbursed, then the opportunity for a loss exists. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. Employees may incur expenses that are not reimbursed in connection with the services they perform for their employer; however, independent contractors are more likely to have unreimbursed expenses than employees.
• The extent of the worker's investment. An independent contractor often has a significant investment in the facilities he or she uses in performing services for someone else. However, a significant investment is not required.
• The extent to which the worker makes services available to the relevant market.
• How the business pays the worker. An employee is generally paid by the hour, week, or month. An independent contractor is usually paid by the job. However, it is common in some professions, such as law, to pay independent contractors hourly.
• The extent to which the worker can realize a profit or incur a loss. An independent contractor can make a profit or incur a loss; an employee usually is paid only for the time worked.

Type of relationship. Facts that show the parties' type of relationship include:

• Written contracts describing the relationship the parties intended to create.
• Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay.
• The permanency of the relationship. If a worker is engaged with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship.
• The extent to which services performed by the worker are a key aspect of the regular business of the employer. If a worker provides services that are a key aspect of regular business activity, it is more likely that the employer will have the right to direct and control the worker's activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney's work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.

When considering the employee/independent contractor issue, the Division does not recognize Section 530, Safe Harbor, of the Internal Revenue Code.

For more information, you may download the pamphlet, Who are Employees? (MODES-INF-310).