The Origin of the 20-Factor Test
The IRS developed the 20-factor test (also called the "right to control" test) in Revenue Ruling 87-41 to help determine whether a worker is an employee or an independent contractor. While the IRS has since reorganized these factors into three broader categories (behavioral control, financial control, and relationship type), the original 20 factors remain a widely used framework for analyzing worker classification.
No single factor is decisive. The IRS and courts weigh the totality of the circumstances, looking at the overall picture of the working relationship. Here's a detailed look at each factor and what it means in practice.
The 20 Factors Explained
1. Instructions
Employee indicator: The worker must follow the company's instructions about when, where, and how to work.
Contractor indicator: The worker decides their own methods and processes. The company may specify the desired result but not how to achieve it.
Example: A company tells a web developer to build a checkout page that processes credit cards. If the company dictates the coding language, framework, and development methodology, that suggests employment. If the developer chooses their own approach, that suggests a contractor relationship.
2. Training
Employee indicator: The company provides training on how to perform the work.
Contractor indicator: The worker uses their existing skills and expertise without company-provided training.
Example: Requiring a marketing contractor to attend the company's internal training on marketing procedures suggests employment. Hiring them precisely because they already have the expertise suggests contracting.
3. Integration
Employee indicator: The worker's services are integrated into the company's core business operations.
Contractor indicator: The worker provides services that are separate from or supplementary to the company's main operations.
4. Services Rendered Personally
Employee indicator: The company requires the specific individual to perform the work.
Contractor indicator: The worker can hire assistants or subcontractors to complete the work.
5. Hiring, Supervising, and Paying Assistants
Employee indicator: The company hires, supervises, and pays the worker's assistants.
Contractor indicator: The worker hires, supervises, and pays their own assistants or subcontractors.
Factors 4 and 5 work together. If the company insists that only the specific contractor perform the work AND controls any additional help, the relationship looks more like employment.
6. Continuing Relationship
Employee indicator: The relationship is ongoing and indefinite.
Contractor indicator: The relationship is for a specific project or defined period.
7. Set Hours of Work
Employee indicator: The company sets specific working hours.
Contractor indicator: The worker sets their own schedule.
8. Full-Time Requirement
Employee indicator: The worker must devote substantially full-time effort to the company.
Contractor indicator: The worker is free to work for multiple clients and allocates their own time.
9. Doing Work on the Company's Premises
Employee indicator: The work is performed at the company's location.
Contractor indicator: The worker chooses where to work (home office, their own office, co-working space).
10. Order or Sequence of Work
Employee indicator: The company dictates the order in which tasks must be performed.
Contractor indicator: The worker determines their own workflow and task sequencing.
11. Oral or Written Reports
Employee indicator: The worker must submit regular progress reports.
Contractor indicator: The worker reports primarily on completed deliverables, not ongoing activity.
Regular check-ins and milestone reviews are normal in contractor relationships and don't automatically suggest employment. The key is whether reporting focuses on outcomes (contractor) or on activity and process (employment).
12. Payment by Hour, Week, or Month
Employee indicator: The worker is paid on a regular time-based schedule (hourly, weekly, monthly salary).
Contractor indicator: The worker is paid by the project, by deliverable, or on a commission basis.
13. Payment of Business and/or Traveling Expenses
Employee indicator: The company reimburses the worker's business and travel expenses.
Contractor indicator: The worker covers their own expenses as a cost of doing business.
14. Furnishing Tools and Materials
Employee indicator: The company provides the tools, equipment, and materials needed for the work.
Contractor indicator: The worker provides their own tools and equipment.
15. Significant Investment
Employee indicator: The worker has no significant investment in the facilities or equipment used for work.
Contractor indicator: The worker has made a significant investment in their own business (office space, equipment, software, training).
16. Realization of Profit or Loss
Employee indicator: The worker cannot realize a profit or loss from the engagement.
Contractor indicator: The worker can make a profit or suffer a loss based on their business decisions, efficiency, and management.
17. Working for More Than One Firm at a Time
Employee indicator: The worker works exclusively for one company.
Contractor indicator: The worker simultaneously provides services to multiple clients.
18. Making Services Available to the General Public
Employee indicator: The worker doesn't market their services to others.
Contractor indicator: The worker advertises, maintains a website, has business cards, and actively seeks clients.
19. Right to Discharge
Employee indicator: The company can fire the worker at any time.
Contractor indicator: The company can only terminate the relationship according to the terms of the contract (with notice, for cause, etc.).
20. Right to Terminate
Employee indicator: The worker can quit at any time without liability.
Contractor indicator: The worker may face contractual consequences for terminating before completing the agreed-upon work.
The Modern Three-Category Framework
The IRS has reorganized these 20 factors into three broader categories for easier analysis:
Behavioral Control (Factors 1-4, 7, 9-11)
Does the company control or have the right to control how the worker performs the work? The more behavioral control the company exercises, the more likely the worker is an employee.
Financial Control (Factors 12-18)
Does the company control the business and financial aspects of the worker's activities? Workers who bear their own expenses, invest in their business, and can profit or lose from their efforts are more likely contractors.
Type of Relationship (Factors 5-6, 8, 19-20)
What is the nature of the overall working relationship? Permanent relationships with benefits and termination at will suggest employment. Project-based relationships governed by contract terms suggest contracting.
Applying the Test to Your Situation
When evaluating your contractor relationships against these factors:
- Be honest: Apply the factors to the actual working relationship, not just what the contract says
- Look at the whole picture: No single factor determines the outcome
- Document the relationship: Keep records showing how the relationship operates in practice
- Review periodically: Relationships can drift over time, changing the classification analysis
Strengthen Your Classification With a Proper Agreement
A well-drafted independent contractor agreement documents the independence of the contractor relationship and supports the intended classification across all 20 factors. While the agreement alone doesn't determine classification, it creates a strong foundation. PactDraft generates contractor agreements designed to reinforce independent contractor status. Create your agreement now and document your working relationship properly.