What to Know About Tennessee’s 20-Factor Test

Starting on January 1, 2020, Tennessee will adopt a new 20-factor test for determining whether a worker is an independent contractor or an employee. The new law has implications for any employer in Tennessee that uses or plans to use independent contractors in their business.

Background History on the ABC Test vs. 20-Factor Test

Tennessee is among several states that use the ABC test to determine a worker’s employment status. This test considers three factors and places an emphasis on an employer’s ability to control the worker. Under this current law, the state presumes that all workers are employees, and puts the burden of proving independent contractor status on the employer.

While several states use this test, it differs from the test that the IRS uses. This difference can make it hard for Tennessee companies to properly classify workers because they may receive different rulings from the IRS and from the state.

To clear up this discrepancy the state legislature passed House Bill 539 in May. This new bill eliminates the ABC test, adopting the 20-factor test published by the IRS. The new rules will go into effect on January 1.

What is the Tennessee 20-Factor Test?

House Bill 539 puts Tennessee law in line with federal rules regarding employee classification. The new approach gives employers more leeway in determining a worker’s status, and it eliminates the presumption that all workers are employees and not independent contractors.

Here are the 20 factors in the test:

Whether the worker is required to comply with other persons’ instructions about when, where, and how the worker is to work.
Whether the worker must be trained by an experienced employee through correspondence, mandatory meetings, or other methods indicating that the person(s) for whom the services are performed want the services performed in a particular method or manner.
Whether the worker’s services are integrated into the business operations, which, if present, generally shows that the worker is subject to direction and control.
If the services must be rendered personally, then the persons for whom the services are performed are presumably interested in the methods used to accomplish the work, as well as in the results.
If the person(s) for whom the services are performed hire, supervise, and pay assistants, then that generally shows control over the workers on the job.
A continuing relationship between the worker and the person(s) for whom the services are performed indicates that an employer-employee relationship exists. A continuing relationship may exist where work is performed at frequently recurring, although irregular, intervals.
The establishment of set hours of work by the person(s) for whom the services are performed is a factor indicating control.
If the worker must devote substantially full time to the business of the person(s) for whom the services are performed, then the person(s) has control over the amount of time the worker spends working and impliedly restrict the worker from doing other gainful work. An independent contractor is free to work when and for whom he/she chooses.
If the work is performed on the premises of the person(s) for whom the services are performed, then that suggests control over the worker, especially if the work could be done elsewhere.
If a worker must perform services in the order or sequence set by the person(s) for whom the services are performed, or if the person(s) for whom the services are to be performed retains the right to control the sequence, then that shows the worker is not free to follow the worker’s own pattern of work, but, instead, must follow the established routines and schedules of the person(s) for whom the services are performed.
A requirement that a worker submit regular or written reports to the person(s) for whom the services are performed indicates a degree of control.
Payment to the worker by the hour, week, or month generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment made by the job or on straight commission generally indicates the worker is an independent contractor.
If the person(s) for whom the services are performed ordinarily pays the worker’s business or traveling expenses, the worker is ordinarily an employee.
The fact that the person(s) for whom the services are performed furnishes significant tools, materials, and other equipment tends to show the existence of an employer-employee relationship.
If the worker invests in facilities that are used by the worker in performing services and are not typically maintained by employees, such as the maintenance of an office rented at fair value from an unrelated party, then that tends to indicate that the worker is an independent contractor. However, lack of investment in facilities indicates dependence on the person(s) for whom the services are performed for the facilities and the existence of an employer-employee relationship.
A worker who can realize a profit or suffer a loss as a result of the worker’s services, in addition to the profit or loss ordinarily realized by employees, is generally an independent contractor, but the worker who cannot is an employee.
If a worker performs more than de minimis services for multiple, unrelated persons or firms at the same time, then that generally indicates that the worker is an independent contractor.
The fact that a worker makes his/her services available to the general public on a regular and consistent basis indicates an independent contractor relationship.
The right to discharge a worker is a factor indicating that the worker is an employee and the person possessing the right is an employer. An employer exercises control through the threat of dismissal, which causes the worker to obey the employer’s instructions. An independent contractor cannot be fired so long as the independent contractor produces a result that meets the contract specifications.
If the worker has the right to end the worker’s relationship with the person(s) for whom the services are performed at any time the worker wishes without incurring liability, then that also indicates an employer-employee relationship.

What Does the 20-Factor Test Mean for Your Business?

Not much will change with the adoption of the 20-factor test. Workers whose time, payment, and location are largely controlled by their employer will still usually be considered employees, while workers that work more independently will still generally be considered contractors.

What the new test does is allow agencies to get a more complete picture of a worker’s circumstances. The new test tends to be good news for employers, by enabling them to be more flexible with who they categorize as a contractor.

The new law also eliminates the pesky dichotomy between Tennessee and federal law. This means that, starting in January, employers unsure about their employees’ status can file form SS-8 with the IRS to receive a determination. Because the IRS and Tennessee will have the same rules regarding classification, employers will be able to confidently use the determination for both federal taxes and under state law.

While the new law will make some things better for businesses, the 20-factor test is more complex and nuanced than the current ABC test. To ensure that employers are classified correctly, employers should undergo a classification audit before January.

To learn more about how LBMC Employment Partners can help with employee classification, contact us today.