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Wage & Hour
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Independent Contractor Verification
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Independent Contractor Verification
The distinction between an independent contractor relationship and an employment relationship is an important and
sometimes ambiguous one. Independent contractors, as opposed to employees, are not protected by labor standards,
workers compensation, or unemployment insurance, and are treated differently than employees for tax purposes by the
Internal Revenue Service. Contrary to some common thought, parties may not simply agree that their relationship is an
independent contracting relationship rather than employment. The distinction is based, under law, upon objective
characteristics of the relationship. The intent of the parties is only one of twenty such characteristics.
The North Dakota Department of Labor is authorized by N.D.C.C. § 34-05-01.4 to verify the independent
contractor status of future or existing work relationships in the state. While verification is not mandatory for
parties wishing to work as or hire independent contractors, it is available on a voluntary basis to workers and firms
who would like to receive a formal verification from the State as to the status of their work relationship.
What Does the Department of Labor Consider in its Review?
In determining the status of workers who apply for Independent Contractor verification, the Department of Labor will
apply the "Common Law" test. The test contains twenty factors that have been developed based on an
examination of cases and rulings considering whether an individual is an employee. There is no certain number of the
twenty points of the Common Law test that must be met in order to qualify as an independent contractor, and the degree
of importance of each factor varies depending on the occupation and factual context in which the services are
performed. A list of the twenty factors can be found below.
What Happens if the Department of Labor Finds the Worker to be an Independent Contractor?
If the North Dakota Department of Labor finds the worker to be an independent contractor, both the worker and firm
are notified of the affirmative verification in writing, and a certificate is issued to the worker. In addition, the
North Dakota Department of Labor generally provides the firm with an IRS form (SS-8, Determination of Worker Status for
Purposes of Federal Employment Taxes and Income Tax Withholding) that can be submitted to that federal agency should
the firm wish for a determination for tax purposes.
The most significant benefit of an affirmative independent contractor verification is the reduced potential for
future liability. If an independent contractor has received verification by the North Dakota Department of Labor, and
at a later date is found to be engaged in an employer/employee relationship by the Department of Labor, Job Service
North Dakota, or Workforce Safety & Insurance, the finding agency may not require the party determined to be the
employer to pay taxes, premiums or wages, other than those required by the contract, or any interest, penalty, or
delinquency fee with respect to premiums, wages or taxes retroactive to the date the relationship with the employee
began unless, however, the finding agency determines the employer willfully and intentionally entered the relationship
with the purpose of avoiding unemployment compensation taxes, worker's compensation insurance premiums or wages.
However, the finding agency may require the payment of wages, premiums, and taxes for that employee as of the date the
order declaring an employment relationship becomes final.
What Happens if the Department of Labor Finds the Worker to be an Employee?
If the Department is unable to provide an affirmative verification of independent contractor status, it does not
mean that the worker and firm cannot start or continue the relationship unchanged. However, no protection from
retroactive liability for premiums, penalties, taxes, wages, etc. is afforded to either party.
What Else Should I Know About the Independent Contractor Verification Process?
An affirmative verification of independent contractor status is applicable only to the specific work relationship
between the verified worker and firm, and only to work performed in North Dakota. In addition, if the work relationship
between the worker verified to be an independent contractor and the firm for whom he or she works changes
significantly, the parties may wish to reapply as the original verification may have become invalidated by the
changes.
How do I Apply for an Independent Contractor Verification?
Parties who would like an independent contractor verification of their work relationship may complete the attached
Independent Contractor Verification Application (SFN 58394). The form is designed to be completed by the worker and
then submitted to the firm for its review, notation of any additional information the firm may wish to include, and
signature. Once input and review from both parties is received, as evidenced by the signatures of both parties, the
form should be sent to the North Dakota Department of Labor.
Are There Other Uses for the Independent Contractor Verification Application?
In addition to reviewing beginning and existing work relationships as noted above, the department has authority to
determine the status of existing or previous work relationships when necessary within the context of investigating a
claim for unpaid wages. In these instances, a separate Independent Contractor Verification
Application (SFN 58394) is completed by both the wage claimant and the person against whom the claim was filed. The
twenty factors considered in evaluating the relationship are the same.
May I Review the Twenty Factors of the "Common Law" Test?
The following is a list of factors evaluated by the North Dakota Department of Labor when determining the status of
work relationships submitted for review under the department's Independent Contractor Verification process.
- Instructions. A person who is required to comply with other persons' instructions about when,
where, and how the person is to work is ordinarily an employee. This control factor is present if the person or persons
for whom the services are performed have the right to require compliance with instructions.
- Training. Training a person by requiring an experienced employee to work with the person, by
corresponding with the person, by requiring the person to attend meetings, or by using other methods, indicates that
the person or persons for whom the services are performed want the services performed in a particular method or
manner.
- Integration. Integration of the person's services into the business operations generally shows
that the person is subject to direction and control. When the success or continuation of a business depends to an
appreciable degree upon the performance of certain services, the persons who perform those services must necessarily be
subject to a certain amount of control by the owner of the business.
- Services rendered personally. If the services must be rendered personally, presumably the person
or persons for whom the services are performed are interested in the methods used to accomplish the work as well as in
the results.
- Hiring, supervising, and paying assistants. If the person or persons for whom the services are
performed hire, supervise, and pay assistants, that factor generally shows control over the persons on the job.
However, if one person hires, supervises, and pays the other assistants pursuant to a contract under which the person
agrees to provide materials and labor and under which the person is responsible only for the attainment of a result,
this factor indicates an independent contractor status.
- Continuing relationship. A continuing relationship between the person and the person or persons
for whom the services are performed indicates that an employer-employee relationship exists. A continuing relationship
may exist when work is performed at frequently recurring although irregular intervals.
- Set hours of work. The establishment of set hours of work by the person or persons for whom the
services are performed is a factor indicating control.
- Full time required. If the person must devote substantially full time to the business of the
person or persons for whom the services are performed, such person or persons have control over the amount of time the
person spends working and impliedly restrict the person from doing other gainful work. An independent contractor, on
the other hand, is free to work when and for whom he or she chooses.
- Doing work on the premises of the person or persons for whom the services are performed. If the
work is performed on the premises of the person or persons for whom the services are performed, that factor suggests
control over the person, especially if the work could be done elsewhere. Work done off the premises of the person or
persons receiving the services, such as at the office of the worker, indicates some freedom from control. However, this
fact by itself does not mean that the person is not an employee. The importance of this factor depends on the nature of
the service involved and the extent to which an employer generally would require that employees perform such service on
the employer's premises. Control over the place of work is indicated when the person or persons for whom the
services are performed have the right to compel the worker to travel a designated route, to canvass a territory within
a certain time, or to work at specific places as required.
- Order or sequence set. If a person must perform services in the order or sequence set by the
person or persons for whom the services are performed, that factor shows that the person is not free to follow the
person's own pattern of work but must follow the established routines and schedules of the person or persons for
whom the services are performed. Often, because of the nature of an occupation, the person or persons for whom the
services are performed do not set the order of the services or set the order infrequently. It is sufficient to show
control, however, if such person or persons retain the right to do so.
- Oral or written reports. A requirement that the person submit regular or written reports to the
person or persons for whom the services are performed indicates control. By contract, however, parties can agree that
services are to be performed by certain dates and the persons performing those services can be required to report as to
the status of the services being performed so that the person for whom the services are being performed can coordinate
other contracts that person may have which are required in the successful total completion of a particular
project.
- Payment by hour, week, month. Payment 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 a straight commission generally indicates that the
worker is an independent contractor.
- Payment of business or traveling expenses, or both. If the person or persons for whom the services
are performed ordinarily pay the person's business or traveling expenses, or both, the person is ordinarily an
employee. An employer, to be able to control expenses, generally retains the right to regulate and direct the
person's business activities.
- Furnishing of tools and materials. The fact that the person or persons for whom the services are
performed furnish significant tools, materials, and other equipment, tends to show the existence of an
employer-employee relationship.
- Significant investment. If the person invests in facilities that are used by the person 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), that factor tends to indicate that the person is an independent contractor. On the
other hand, lack of investment in facilities indicates dependence on the person or persons for whom the services are
performed for such facilities, and, accordingly, the existence of an employer-employee relationship.
- Realization of profit or loss. A person who can realize a profit or suffer a loss as a result of
the person's services (in addition to the profit or loss ordinarily realized by employees) is generally an
independent contractor, but the person who cannot is an employee. For example, if the person is subject to a real risk
of economic loss due to significant investments or a bona fide liability for expenses, such as salary payments to
unrelated employees, that factor indicates that the person is an independent contractor. The risk that a person will
not receive payment for his or her services, however, is common to both independent contractors and employees and thus
does not constitute a sufficient economic risk to support treatment as an independent contractor.
- Working for more than one firm at a time. If a person performs services under multiple contracts
for unrelated persons or firms at the same time, that factor generally indicates that the person is an independent
contractor. However, a person who performs services for more than one person may be an employee for each of the
persons, especially when such persons are part of the same service arrangement.
- Making service available to general public. The fact that a person makes his or her services
available to the general public on a regular and consistent basis indicates an independent contractor
relationship.
- Right to discharge. The right to discharge a person is a factor indicating that the person is an
employee and the person possessing the right is an employer. An employer exercises control through the threat of
dismissal, which causes the person to obey the employer's instructions. An independent contractor, on the other
hand, cannot be fired so long as the independent contractor produces a result that meets the contract
specifications.
- Right to terminate. If the person has the right to end his or her relationship with the person for
whom the services are performed at any time he or she wishes without incurring liability, that factor indicates an
employer-employee relationship. A contract can be terminated by the mutual agreement of the parties before its
completion or by one of the parties to the contract before its completion to prevent a further breach of the contract
or to minimize damages. This situation indicates an independent contractor relationship.
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