Employee Vs. Contractor: How to Categorize YOUR Employee

Classifying workers has gigantic implications for businesses, especially with the world going

through COVID-19, but it is especially troublesome in the Volunteer State. The answer to whether a

worker is an employee or independent contractor drastically affects what they are entitled to. For

example, according to the employer handbook for the State of Tennessee Department of Labor and

Workforce Development Division of Employment Security, an employer “must withhold income tax,

withhold and pay social security and Medicare taxes,” and pay unemployment taxes on employees’

wages, while there are no such requirements for independent contractors. 1

There are even different tests employers must apply to figure out whether workers are their

own employees or just independent contractors. For example, the test to decide whether a worker is an

employee or an independent contractor for the purposes of workers’ compensation depends on seven

factors: the employee’s right to control the conduct of the work, the right of termination, the method of

payment, the freedom to select and hire helpers, whether tools are furnished, and whether the worker

makes their own schedule, and the freedom to offer services to other entities. 2 Since the above test is

factor-based, the answer is very fact-specific and not all of these factors have to be met for a worker to

be an independent contractor. To illustrate, if an employer supplies tools, pays by the month, makes the

schedule, and gives instructions on how to perform the work, then that worker is most likely an

employee according to this test.

As of January 1, 2020, Tennessee adopted a twenty-factor test from the IRS to determine

whether workers are employees or independent contractors. 3 This twenty-factor test is used to

determine whether a worker is an employee and is thus entitled to the benefits as part of the Tennessee

Employment Security Law discussed above. 4 Some notable differences between the seven factor test

and this twenty factor test are that the twenty factor test includes training: if a worker is trained by

another employee, corresponds with them, or is required to go to meetings for training, then that

indicates an employer-employee relationship. 5 Another new factor is significant investment: if the

worker invests in facilities used in performing the job, then that tends to point toward them being an

independent contractor, whereas lack of investment points to an employee. 6 The twenty factor test also

seems to make separate factors that were once combined in the earlier seven factor test: for example,

working hours, whether the work was done on the employer’s premises, if a worker has to do work in a

certain order or sequence, whether there are instructions on what to do, and if a worker has to submit

reports on the job or once the job is done, seems to be grouped into the original seven factor test under

the conduct of the work. Moreover, the right to discharge or terminate are separate factors in the

twenty-factor test, where they would probably be together in the older seven-factor test.

There are arguments for either side on whether this new IRS test makes it easier or harder for

employers to classify workers as employees or independent contractors. On one hand, the IRS test has

much more detail in each of its factors, so employers have more guidance when deciding on

classification. As mentioned, the IRS test seemingly adds factors that were together in the previous test.

1 State of Tennessee Department of Labor and Workforce Development Division of Employment Security (2019

handbook)

2 Tenn. Code Ann. Section 50-6-102(12)(D)(i)

3 Tenn. Code Ann. Section 50-2-111

4 Tenn. Code Annotated 50-7-207(b)(2)(B)

5 Id.

6 Tenn. Code Ann. Section 50-2-111

While this does add more guidance, employers could also see the new test as overwhelming. For

example, under the employee’s premises factor, the TCA says this factor’s importance depends “on the

service involved and the extent to which an employer generally would require that employees perform

those services on the employer's premises.” 7 Another example is hiring, supervising, and paying

assistants: if an employer does any of this for workers, then that points to an employer-employee

relationship, unless a worker does this as part of a contract for giving materials and labor for a job, then

they are an independent contractor. As you can see, this new test is not exactly clear, so if an employer

were to incorrectly classify an employee, it would not be a surprise.