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Are Producers Independent Contractors or Employees?

This question comes up frequently with respect to payroll taxes, to benefits programs and to workers compensation rules. This is obviously an important issue, the results of which can cause state and IRS problems that can haunt you for a long time. The determination of status as an employee or contractor is not one of convenience or money-saving efforts. It is one of law and you must consider these guidelines carefully before designating people to either category.

Note from Editor: The article below addresses primarily the human resources implications of producer employment from a generalistic national perspective. Whether a producer is an employee or independent contractor for purposes of workers compensation will vary from state to state depending on statutes, case law, and the unique circumstances of each employment relationship.

Are Producers 1099 Contractors or Employees?

OR (with apologies to Jeff Foxworthy)

(S)He May Be an Employee If.…

Whether a worker is an independent contractor or an employee is based on three main issues: (1) behavioral control, (2) financial control, and (3) relationship of the parties. These are each subjective considerations, but they must be made carefully for each worker to avoid future problems for both the worker and the employer.

BEHAVIOR CONTROL

(S)he may be an employee if you direct and control the worker. This doesn’t have to be specific instructions (although the procedure of inputting customer information or transactions into an automation system certainly qualifies). General instructions like who to solicit (what lines of business, target markets, geographic areas), how they are to be solicited (marketing plans used by producers), responses to solicitations (like Sales Call Reports) and directions of how to process those prospects (like specifically and fully completing applications for underwriting) are forms of control that will likely be defined as an employee/employer relationship rather than one of independent contractor. If you provide direct training to allow the person to do the job, (s)he may be an employee.

FINANCIAL CONTROL

There is no precise dollar or percentage test to determine whether the employer has financial control over a worker or if the worker has made a significant investment in his/her work. But:

(s)he may be an employee if you pay for all the equipment (like computers, reference materials, office equipment) used by the worker.
(s)he may be an employee if you reimburse business expenses (like mileage, T&E, education, licensing, etc)
(s)he may be an employee if (s)he either can’t profit from his/her increased profitability to you OR if (s)he can’t suffer financial loss from his/her failed efforts.

RELATIONSHIP OF THE PARTIES

(S)he may be an employee if (s)he receives benefits, pension, or paid vacation.
(S)he may be an employee even if (s)he doesn’t receive benefits (based on other considerations).
(S)he may be an employee if there is a written contract between the worker and the business.
(S)he may be an employee if (s)he works only for one employer and/or maintains an office (at no cost) at the employer’s location.

As you can see, most workers in insurance agencies will be defined as employees based on these considerations. Please consult your tax and legal advisors to make certain that you are following the guidelines regarding how you treat your workers. You may also call Agency Consulting Group, Inc. (800-779-2430) to speak to Sherry Diamond, EA. As an Enrolled Agent (and President of the N.J. Association of Tax Professionals), Sherry is an expert in taxation (and a great wife and mother and grandmother, by the way) and can help explain these guidelines to you.

In addition, here is a questionnaire used to determine the likelihood of a worker being considered an employee or contractor. The more ‘Yes’ answers, the more likely that the individual will be considered an employee.

Instructions -Does the boss have the legal right to give instructions to the worker during the work project?
Training -Does the boss teach or train the worker to perform the tasks involved in the project?
Integration -Is the job such that various components must be performed by various workers independently, with one task finished before the next begins?
Services Performed Personally - Does the boss expect that the worker perform the project (him) herself - not by someone else?
Hiring, Supervising, or Paying Assistants - Does the boss select, oversee, or compensate individuals helping with the project?
Continuing Relationship - Does the worker perform services periodically?
Fixed Hours of Work - Does the boss determine when the worker works?
Full Time Required - Does the boss expect the worker to work full time or not hold another job with the boss's competitors?
Work on Employer's Premises - Does the worker perform services at the location of the boss's business?
Set Sequence or Order - Does the boss have the right to tell the worker which tasks to perform first?
Oral or Written Reports - Does the boss expect the worker to report progress as the job is in process?
Payment by Units of Time - Does the boss compensate the worker based on either time worked, commissions, or piecework rather on completed project?
Payment of Business or Travelling Expenses - Does the boss pay for out-of-pocket expenses of the worker for travel or entertainment?
Furnishing Tools or Materials - Does the boss provide the tools or materials necessary for the worker to complete the task?
"Significant" Investment - Does the boss have more money at risk in the performance of the task than the worker, (excluding any vehicle owned by the worker and used for any purpose within the task)?
Realization of Profit or Loss - Does the boss risk more out-of-pocket money than the worker excluding the possibility the worker may not get paid?
Multiple Jobs - Does the boss require the worker to only work for the boss's business in the same industry?
Available to the Public - Does the nature of the worker's commitment to the boss severely reduce or restrict the ability of the worker to work for other bosses in the same industry?
Right to Discharge - Can the boss terminate the worker during the project without showing violation of the contract?
Right to Terminate - If the worker arbitrarily quits, does the boss still have to pay for the work completed even though the project is not yet finished?

IMPORTANT EXCEPTION – The tax law specifically exempts Life Insurance Producers from the requirements of employees.

Please get IRS publication 1779 (Rev. 1-2005) – catalog # 16134 for a brochure on the subject (www.irs.gov).