Employee, Consultant, or Independent Contractor

Hello, I’m looking for additional resources to better understand the topic behind a question from Black Spectacles Practice Exam Form 2, PCM. The question is as follows:

A sole practitioner has just been awarded a large commission that will require extra help. The architect isn’t sure if they have enough backlog to hire an employee, so they consider hiring someone as an independent contractor.

Which are factors in determining if the hire is a full-time employee vs. an independent contractor? Check the three that apply.

Number of hours worked
Type of service performed
Degree of financial control
Type of relationship
Location where work is performed
Degree of behavioral control

The exam answers say that degree of financial control, type of relationship, and degree of behavioral control are correct, referencing the entirety of the AHPP and Law for Architects as source material.

On page 108 of A Guide to Turning Designs into Buildings, Segal says the following in his discussion of hiring employees: “… the IRS has very clear rules distinguishing a ‘consultant’ from an ‘employee.’ If your employer tells you what to do and how to do it; if you work for your employer primarily in the employer’s office; and if you spend most of your working time working for that employer and not for others, you are an employee, not a consultant.” This source pretty clearly identifies degree of behavioral control, location where work is performed, and number of hours worked as the three correct answers.

I thought the key verbiage may be between a consultant and an independent contractor; but after some research, I found that, per many legal documents and AIA references, a consultant is hired as an independent contractor and their contracts refer to them as such. There seems to be no material difference between the two words.

Am I missing a reference which somehow differentiates a consultant from an independent contractor within NCARB study material? If not, why are Segal’s answers not the three “best” of the many viable answers? Where can a discussion of the better answers be found?

Thanks!

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Hey @sillscai - I think the point of this question is to understand the difference between employees and independent contractors for tax purposes.

This is taken from the IRS website:

Common Law Rules

Facts that provide evidence of the degree of control and independence fall into three categories:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
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Hi @sillscai ,

I’ll see if I can help clear this up! Thanks for the helpful link @Smith.Marks .

Segal’s book is really coming from the point of view that employers should pay their employees as salaried with benefits if they are working 40 hours per week directly underneath them. A lot of times, employers may try to make someone who is performing the role of a salaried employee an independent contractor to avoid paying them their due benefits required by law. Segal is really trying to emphasize this is not an ethical practice.

I think that the answers given mostly align with those you’ve quoted in Segal’s book. The only iffy one is the mention of hours worked. It seems he has taken some liberty in also throwing in the hours worked as well compared to the IRS. I can understand the ambiguity there.

@coachchrishopstock can you take a look at this and weigh in on it?

Thanks!
-Darion

Thanks for looping me into this @coachdarionziegler, and thanks @sillscai for the question and @Smith.Marks for your response! The link that you provided to the IRS website is a great resource in understanding the difference between employees and contractors.
Of the 6 choices given, I’d say that our 3 correct answers are the best answers for this question.

It’s a complicated topic so I want to urge everyone not to get too deep into reading IRS commentary on the topic, but rather to understand the general concepts.

Number of hours worked isn’t a great response to this question because it’s somewhat an ambiguous choice - working 10 hours for an employer doesn’t necessarily mean you’re an employee or contractor, whereas the other correct choices are certainly factors. I somewhat disagree with the line on page 108 that states " if you spend most of your working time working for that employer and not for others, you are an employee, not a consultant" - If I work 1 hour for a firm and do not work for any others, it doesn’t automatically make me an employee of that firm, I’d almost certainly still be a contractor.

Location where the work is performed is similarly ambiguous - for example, I’ve worked as a consultant on projects where I was occasionally needed to go into the office and perform site visits, but that doesn’t automatically make me an employee. The degrees of behavioral and financial control, as well as the type of relationship, are absolutely contributors to the employee vs. contractor discussion.

I hope this was helpful!

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