Should Your Salespeople Be Independent Contractors or Employees?
Salespeople can be independent contractors or they can be employees. Figuring out which is best for any company can be difficult. Many businesses prefer to have salespeople considered as independent contractors because no FICA taxes and benefits are required of the company for these workers. But the company must be careful in how it treats workers, to be sure the workers are really independent.
Salespersons – Options for Status and Pay
It seems obvious to define a salesperson as an individual engaged in selling merchandise or services. Salespeople are usually classified as either
- An employee (sometimes called a common law employee)
- An independent contractor
The classification depends on the right of the worker to control or direct the work being done. The IRS says that what matters is that "the employer has the legal right to control the details of how the services were performed."
How Federal and State Regulations Dictate Salesperson Status
The IRS considers workers to be employees unless there is a compelling reason to consider them as independent contractors. They base the decision on the facts in the specific case compared to three common law rules:
- Behavioral control
- Financial control
- Type of relationship
The U.S. Department of Labor looks differently at outside sales people (those selling remotely) and inside salespeople (those working at the sales office). The Fair Labor Standards Act considers outside sales employees as exempt from minimum wage requirements. Outside sales employees are also exempt from overtime, unless they are paid less than $684 a week.
State Laws and Salesperson Status
Some states have laws dealing with the status of salespersons. For example, California law uses the same common law rules as the IRS, for the purpose of determining eligibility for unemployment insurance.
Status of Types of Salespeople
Retail salespeople who sell directly to consumers are typically considered employees, paid by commission, salary, or by the hour.
Salespeople who drive a route (delivering food or beverage products, for example) are usually employees unless they have a substantial investment in the facilities (not transportation) used in performing their services.
Most real estate agents operate as sole proprietors. They are in a special IRS category called "statutory non-employees," treated as self-employed for all federal tax purposes, including income taxes and employment taxes. The requirements are that:
- Substantially all payments for their services are directly related to sales or other output (not based on hours worked)
- They have a written contract providing that they won't be treated as employees for federal tax purposes
Insurance agents have been classified as independent contractors for retirement benefit purposes, by a federal court in 2019. The court looked at the specific situation against the common law standard to make this determination. Other types of insurance agents might be classified differently.
Some states may have specific requirements for treating life insurance agents as independent contractors. New York, for example, considers licensed insurance agents as independent contractors for workers' compensation purposes if the person meets all the following requirements:
- Has income based on sales (not hours worked)
- Is not a life insurance agent receiving a traning allowance subsidy
- Has a contract outlining the service they are to performed, which can be terminated by either party at any time with notice
- Can work any hours they chose
- Incur their own expenses (except that office facilities and supplies may be provided by the real estate firm)
- Is NOT to be treated as an employee for state and federal tax purposes (other than FICA tax for Social Security/Medicare required for full time life insurance agents)
Both employees and independent contractors can be paid commissions, in addition to or instead of a salary or contractual payments.
Salespeople as independent Contractors: A Specific Case
A 2008 federal district court heard an Iowa case dealing with the status of a company selling livestock products and the classification of the salespeople as independent contractors. Take a look at the specific findings of the Court:
- The salesmen (all men in this case) had no set territory, no set hours of work, and no one else had control over when they worked. All three of these factors indicate an independent contractor situation.
- All of the salesmen had training, which consisted of "riding along," providing advice, or seminars, but much of the training had to do with the specifics of the products being sold, rather than details of how to sell. The Court decided that this factor was only "minimally" decisive.
- There was no requirement that the salesmen submit written reports, although some submitted these reports voluntarily.
- The salesmen were paid by commission, but they could take a draw against next week's commission; commission indicates independent contractor status, but the draw indicated salary and employee status. This factor was not considered in the evaluation.
- Expenses were paid by the company and the salesmen were provided a vehicle to use to make sales calls and deliver products. Both of these factors indicate an employment relationship.
- The salesmen did not invest in facilities to use in performing duties; they were reimbursed for their expenses. Lack of investment in facilities and reimbursement both indicate an employer-employee relationship.
- Two of the salesmen reported working for other companies – too few to be considered a factor in the decision.
- Either the salesman or the company could terminate the relationship at any time, indicating an employment situation.
- Finally, the salesmen said they were not provided with health benefits or other employee benefits.
So, what was the Court's finding?
Even though a number of factors indicated independent contractor relationship, the Court didn't find the independent contractor items compelling enough to change the status of these salesmen from employee to independent contractor.