Santos v. Commissioner
T.C. Memo. 2020-88

On June 17, 2020, the Tax Court issued a Memorandum Opinion in the case of Santos v. Commissioner (T.C. Memo. 2020-88). The sole issue before the court in Santos v. Commissioner was whether the individuals listed on the notice of determination should be legally classified as employees (IRS’s position) or as independent contractors (petitioner’s position).

The Entrepreneurial Housekeeper in Santos v. Commissioner

The petitioner was born and raised in Brazil and moved to the U.S. in 1996. Shortly thereafter, she began cleaning residential homes. It turned out that the petitioner had the knack for bringing beauty out of the dingiest homes, and soon the word got around, and she began cleaning apartments and later the apartment buildings themselves. The petitioner could not do this alone, and so she recruited other Brazilian immigrants to assist her through advertisements she posted in Brazilian hair salons. Can’t fault the lady for knowing her market. She owned and operated an unincorporated cleaning company until at least 2011, though health problems had forced her to stop cleaning personally in 2009.

Arrangements with Workers

The workers did not have written employment contracts with the petitioner’s company. The petitioner did not guarantee them a minimum amount or frequency of work, and the workers could decline to do a cleaning job for whatever reason. Many of the petitioner’s workers cleaned for other individuals or businesses as well. The petitioner paid her workers weekly, and their pay was based on a fixed rate of $50-$70 per apartment cleaned, depending on the size of the apartment.

The petitioner did not provide paid leave for sickness or vacation and did not offer health insurance, retirement benefits, or any other employee benefits. The workers that the petitioner sent to do a cleaning job generally used their own or public transportation to get to the property, and they brought with them and used their own cleaning supplies. They were also free to hire their own assistants; and if they did so they (not the petitioner) were responsible for paying these assistants.

Upon arriving at a property, the worker would be given a key to the apartment that needed to be cleaned and directed to that apartment by the property manager. The petitioner would rarely go to a property and supervise the cleaning, and once the cleaning was done, she would not go to the property and do a post-cleaning inspection.

If the cleaning was deficient in some respect and the worker had already left the property, the property manager would contact the petitioner, and the petitioner would then direct the worker to return to the property to remedy the problems. At no point did the petitioner formally discharge or terminate any of her workers.

The Age-Old Question – Employee or Independent Contractor

Whether an individual is an employee or independent contractor is a factual question, and the Tax Court turns to common law principles for answers. Weber v. Commissioner, 103 T.C. 378, 386 (1994), aff’d per curiam, 60 F.3d 1104 (4th Cir. 1995); see also IRC § 3121(d)(2) (defining an employee with reference to “the usual common law rules applicable in determining the employer-employee relationship”); IRC § 3306(i). The Treasury Regulations provide guidance with respect to classifying a worker as a common law employee. See Treas. Reg. § 31.3121(d)-1(c)(2).

The Treasury Regulations provide that an employer-employee relationship generally exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished, which is to say the employer controls not only what is to be done but how it is to be done. Id. On the flipside, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work, but not the means and methods for accomplishing the result, the worker will generally be treated as an independent contractor. Id.

There is no list of factors adopted by all courts. In fact, it is not uncommon to find the same court applying different factors, depending on the judge, the season, and the way the wind is blowing the particular afternoon when the opinion is being written. Weber, 103 T.C. at 387. The Tax Court (at least in this case) considered the following factors to be a pretty good representation of the pertinent factors: (1) the degree of control exercised by the principal over the worker; (2) which party invests in the work facilities used by the worker; (3) the worker’s opportunity for profit or loss; (4) whether the principal can discharge the worker; (5) whether the work is part of the principal’s regular business; (6) the permanency of the relationship; and (7) the relationship the parties believed they were creating. See Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263, 270 (2001); Weber, 103 T.C. at 387. Not unsurprisingly, given the fact that courts cannot settle on a list of factors, no single factor is, by itself, dispositive, and all facts and circumstances must be considered. Id.

Emphasis on Control Over Worker

For the Tax Court, and for most courts considering the employee/independent contractor classification question, the extent to which the principal has the right to exercise control over the worker is the “crucial test.” Weber, 103 T.C. at 387; see also Casey v. Dep’t of Health & Human Servs., 807 F.3d 395, 405 (1st Cir. 2015). Thus, if the principal retains the right to direct the manner in which the work is to be done, controls the methods to be used in doing the work, and controls the details and means by which the desired result is to be accomplished, then it is more likely than not that a court will find an employee-employer relationship. Atl. Coast Masonry, Inc. v. Commissioner, T.C. Memo. 2012-233, *15; Ellison v. Commissioner, 55 T.C. 142, 152-53 (1970).

(T.C. Memo. 2020-88) Santos v. Commissioner

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