Sometimes a company will hire a person as an “employee” and sometimes as an “independent contractor” (consultant). It can be confusing to determine whether, based on the work they do and other factors, a worker is an employee or an independent contractor. The issue is important, as there are personal income tax, corporate income tax, liability, and other implications that turn on whether the person is an employee or an independent contractor. In addition to tax and liability consequences, the test can help to determine whether a worker is subject to Vietnam’s Labor Code, including rules on overtime, vacation, and discipline.
The U.S. Internal Revenue Service (US tax authorities) has developed a 20-factor test to help determine whether a person is an independent contractor or an employee. While the 20-factor test is based on U.S. common law, it also applies very well in Vietnam.
The 20-factor test illustrates the principle that the more control an employer has over a worker, the more likely it is that the worker is an employee. The more a worker is required to follow an enterprise’s procedures, rules, and to seek its authorization to act, the more likely she will be considered an employee rather than an independent contractor.
This article discusses the IRS’s 20-factor test. As you will see, this is not a purely objective test. The answer to some questions may suggest that the worker is an employee, while the answer to other questions may suggest that the same person is an independent contractor. To get value from the application of the test, ask all the questions and then, depending on the answers, make an overall judgment as to whether the worker is more likely to be an “employee” or an “independent contractor”.
THE 20-FACTOR TEST
- INSTRUCTIONS. A worker who is required to comply with another persons’ instructions about when, where, and how she is to work is typically an employee. This factor is especially pertinent if the enterprise for which the services are performed has the right to require compliance with instructions.
- TRAINING. Training a worker by requiring an experienced employee to work with the trainee, by requiring the trainee to attend meetings, or by using specific methods, indicates that the enterprise for which the services are performed wants the services of a new worker to be performed in a particular method or manner. This is consistent with an employer-employee relationship.
- INTEGRATION. Integration of a worker’s services into the business operations generally shows that the worker is subject to direction and control. When the success or continuation of a business depends to a large degree upon the coordinated performance of workers’ services, the workers must necessarily be subject to a certain amount of control by the owner of the business.
- SERVICES RENDERED PERSONALLY. If a worker’s services must be rendered personally (like a pianist), presumably it is the result that is important. This emphasizes the worker’s role as an independent contractor. On the other hand, interest in the method, by which the services are accomplished in addition to the result of the services, is more consistent with an employer-employee relationship.
- HIRING, SUPERVISING, AND PAYING ASSISTANTS. If the enterprise for which the services are performed hires, supervises, and pays an assistant for her work, that generally shows control and thus indicates an employer-employee relationship.
- CONTINUING RELATIONSHIP. A continuing relationship (that is, there are no significant breaks in between) between the worker and the enterprise for which the services are performed suggests that an employer-employee relationship exists. A continuing relationship may also exist where work is performed at frequently recurring, although irregular, intervals. However, a continuing independent contractor relationship is not unusual.
- SET HOURS OF WORK. The establishment of set hours of work by the enterprise for which the services are performed is one factor that may indicate control and thus suggests an employee relationship.
- FULL-TIME REQUIRED. If the worker must devote him- or herself full-time to the business of the enterprise for which the services are performed, the enterprise effectively exercises control over the amount of time the worker spends working and impliedly restricts the worker from doing other gainful work. An independent contractor, on the other hand, is free to work when and for whomever she chooses.
- DOING WORK ON EMPLOYER’S PREMISES. Control over a worker may be inferred if the work is performed on the premises of the enterprise requesting the services, especially if the work could be done elsewhere. Work done off the enterprise’s premises, such as at the worker’s own office, suggests a measure of freedom from control. However, working off premises by itself does not mean that the worker is not an employee. The importance of this factor depends on the nature of the services involved and whether an employer usually requires that employees perform such services on the employer’s premises. Even if a worker performs services off the enterprise’s premises, control can still be apparent if the enterprise and not the worker has the right to decide, for example, whether to work or not to work at specified places.
- ORDER OR SEQUENCE SET. If a worker must perform services in an order or sequence set by the enterprise, this suggests that the worker is not free to follow the worker’s own pattern of work, and is under the enterprise’s control. Even if an enterprise, because of the nature of an occupation, does not set the order of the services, the worker may still be under the enterprise’s control if the enterprise retains the right to set the order of services.
- ORAL OR WRITTEN REPORTS. A requirement that the worker submit regular or written reports to the enterprise for which the services are performed indicates a degree of control but not necessarily an employee relationship. Independent contractors are also often required to provide oral and written reports.
- PAYMENT BY THE 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 to pay a lump sum agreed upon as the cost of a job. Payment made by the job or exclusively by commission generally indicates that the worker is an independent contractor.
- PAYMENT OF BUSINESS AND/OR TRAVELING EXPENSES. If the enterprise for which the services are performed ordinarily pays the worker’s business and/or travelling expenses, this may indicate that the worker is an employee. An employer, by controlling expenses, generally retains the right to regulate and direct the worker’s business activities.
- FURNISHING OF TOOLS AND MATERIALS. The fact that the enterprise for which the services are performed furnishes tools, materials, and other equipment tends to show the existence of an employer-employee relationship.
- SIGNIFICANT INVESTMENT. If the worker invests in facilities that she uses to perform services and those facilities are not typically maintained by employees (such as a worker’s office rented from an unrelated party), this suggests that the worker is an independent contractor. A worker’s lack of investment in facilities indicates dependence on the enterprise for which the services are performed and, accordingly, the existence of an employer-employee relationship. Special consideration, however, is required with respect to certain types of facilities, such as home offices. Home offices are consistent with both “employees” and “independent contractors”.
- REALIZATION OF PROFIT OR LOSS. A worker who can realize a profit or who suffers a loss as a result of the worker’s services (different from the profit or loss ordinarily realized by employees) is generally an independent contractor, but the worker who cannot realize a profit or loss is an employee. There is a common risk to both independent contractors and employees that they may not be paid for their services, but an independent contractor often runs the additional risk of not recouping substantial out-of-pocket expenses (for materials, wages for the contractor’s own employees, etc.). But note that an employee may be subject to a bonus system as well as to a salary without fundamentally changing the nature of the relationship.
- WORKING FOR MORE THAN ONE ENTERPRISE AT A TIME. If a worker performs more than minimal services for several unrelated persons or enterprises at the same time, that fact generally indicates that the worker is an independent contractor.
- MAKING SERVICES AVAILABLE TO THE GENERAL PUBLIC. The fact that a worker makes her services available to the general public on a regular and consistent basis suggests that she is an independent contractor.
- RIGHT TO DISCHARGE. An enterprise’s right to discharge a worker is a factor which indicates an employer-employee relationship. An employer exercises control through the threat of dismissal, which causes the worker 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’s specifications. However, this distinction may not be so large in Vietnam because it is difficult to discharge an employee.
- RIGHT TO TERMINATE. If the worker has the right to end her relationship with the enterprise for which the services are performed at any time she wishes without incurring liability, that factor indicates an employer-employee relationship.
While this test was developed with US law in mind, it can still provide valuable guidance in Vietnam when the status of a worker is in question.
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The article originally appeared in Vietnam Law and Legal Forum and has been updated. It also appeared in Lexology on 9 October 2020.