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socrateaser, Lawyer
Category: California Employment Law
Satisfied Customers: 39140
Experience:  Retired (mostly)
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We have statutory employees as our sales representatives.

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We have statutory employees as our sales representatives. We withhold social security & medicare taxes from them and send them a W-2 checking the block "statutory employee," our salesmen pay their own expenses. They are not part of our profit sharing program for common law employees. They are on our group health insurance plan, but we add the premium we pay for them back to their income and it is reported on their W2..

How much control do we as their employer have over their activities?
Can we require weekly sales reports?
Can we require them to make a certain number of calls?
Can we pay them a base salary and then require them to meet certain sales goals in order to earn additional commission or bonuses?
How much control do we as their employer have over their activities?

A: The general and overarching rule is that a worker is an employee, if the employer has the right to control the means and method by which the employee undertakes his/her labor. The more factors which weigh in favor of control, the more likely that a court (and the IRS) will determine that the worker is in fact an common law employee.

Can we require weekly sales reports?

A: This is a weak factor. By itself, it wouldn't make the independent contractor an employee.

Can we require them to make a certain number of calls?

A: No. You would be controlling the employee's method of labor.

Can we pay them a base salary and then require them to meet certain sales goals in order to earn additional commission or bonuses?

A: This depends on how strictly your goals operate to control the worker's labor. If the requirements of the commissions/bonuses operate to control the worker's method of labor, then the worker is an employee.

The traditional common law factors for the determination of employee v. independent contractor are (Community for Creative Non-Violence v. Reid, 490 US 730, 751-752 (1989)):

1. The hiring party's right to control the manner and means by which the product is accomplished.[18]
2. The skill required;[19]
3. The source of the instrumentalities and tools;[20]
4. %he location of the work;[21]
5. The duration of the relationship between the parties;[22]
6. Whether the hiring party has the right to assign additional projects to the hired party;[23]
7. The extent of the hired party's discretion over when and how long to work;[24]
8. %he method of payment;[25]
9. The hired party's role in hiring and paying assistants;[26]
10. Whether the work is part of the regular business of the hiring party;[27]
11. Whether the hiring party is in business;[28]
12. The provision of employee benefits;[29] and
13. The tax treatment of the hired party.[30]

See Restatement § 220(2) (setting forth a nonexhaustive list of factors relevant to determining whether a hired party is an employee).[31] No one of these factors is determinative.

I realize that this is somewhat vague -- however, the law is vague -- deliberately so. The government has a great interest in transforming all workers into employees, because it's so much easier to control the flow of tax money.

BotXXXXX XXXXXne: more control = more risk of full employment status. Maybe the solution is to just bite the bullet and hire everyone as a regular employee.

Hope this helps.
Customer: replied 4 years ago.

Since our sales reps are Statutory Employees, do you think the same rules apply to them as do independent contractors?


When our business started 37 years ago, the reps were independent contractors and we made them Statutory Employees to avoid the government getting involved. Do you think the IRS wants to make statutory employees, common law employees. Since they are getting their payroll taxes from us as their employer?

A statutory employee is an independent contractor that the government has determined must be treated for tax purposes as an employee. The reason is because the IRS has determined over time, that this is an area where workers and employees have managed to "thread the needle" and avoid employment tax liability.

The IRS probably doesn't care about whether or not you push the employees closer to the line of a common law employee. However, the employees may, and if they sue you for unpaid health care and/or retirement benefits, then you could find yourself defending a rather expensive legal action.

Note: the State of Tennessee may have its own ideas about whether or not there is a benefit to changing worker status. If you are already paying unemployment and workers compensation to the State, then there's no issue. If you are not, then you could find an entirely different hassle that could be created -- one which has some pretty hefty associated fines.

Hope this helps.
Customer: replied 4 years ago.

We pay state and federal unemployment to TN and each state where we have statutory employees. About 25 states. We also carry workers compensation insurance on them.


So your botXXXXX XXXXXne is the statutory employee is the one who may object to not being a common low employee more than the IRS?

Yes, I think you have it correct.

An employee who believes he/she is being discriminated against in the provision of federal ERISA retirement or group health care benefits, can either bring legal action directly against the employer's plan administrator -- or, the employee can file a complaint with the U.S. Department of Labor. USDOL may investigate (IRS will merely react to any finding of the investigation). There are ways that a retirement plan can avoid liability for misclassified workers, but it requires certain text in the plan documents -- and this goes way beyond anything that I can discuss in this forum.

But, the botXXXXX XXXXXne, as you put it, is that the employee would have to initiate a complaint -- it won't come from the IRS.

Hope this helps.
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