TN 12 (01-12)

RS 02101.300 Statutory Employees


Social Security Act, Section 210(j) (3) , Internal Revenue Code, Section 3121(D) (3); 20 CFR 404.1008

A. Definition of a service contract

A service contract is an oral or written arrangement to complete work.

B. Introduction to statutory employees

Statutory employees include workers from four occupational groups who perform services under certain prescribed circumstances. These workers cannot qualify as employees under the common-law rules, but their work conditions are so similar to those who do that Congress provided for their coverage as statutory employees, rather than as self-employed persons. Statutory employees include:

  • agent or commission drivers who deliver food or beverages (other than milk) or pick up and deliver laundry or dry cleaning for someone else;

  • full-time life insurance salespeople who sell primarily for one company;

  • home workers who work by the guidelines of the person to whom they are providing services; and

  • traveling or city salespeople who work full time for one company or person.

C. When Social Security covers statutory employees

These workers are employees for social security coverage purposes when:

  • they have no substantial investment in facilities to do the work (other than transportation);

  • they perform services in a continuing work relationship; and

  • the service contract contemplates that they will perform substantially all of the services personally.

D. Worker delegates work

The service contract or work arrangement must contemplate that the worker does a substantial portion of the work. The worker does not have authority to delegate a substantial part of the work covered by the service contract in the designated occupation to any other person. However, where the contract contemplates that the salesperson do all the work personally and the alleged employer does not agree to delegate part of this work to another, the fact that the salesperson does so would not preclude coverage under this section.

The important thing is not whether the worker delegates part of the work to another, but rather whether the worker has the authority under the contract to do so. The mutual intent of the parties governs.

Sometimes, a worker delegates part of the work to another when the contract or work agreement expressly forbids it, or the contract contemplates a delegation of part of the work and the worker performs all of the services alone. In such cases, determine whether the worker is violating the service contract, or whether the contract permits the worker to act accordingly.

A contract that contemplates hiring a chauffeur would not affect the personal service requirement because the chauffeur’s services are incidental to the selling activity. Similarly, the right to hire a substitute or assistant occasionally would not preclude compliance with this provision.

E. Worker’s substantial investment

In reference to statutory employees, substantial investment refers to the worker furnishing substantial facilities to conduct business. Consider all of the facts for each case to determine whether the facilities furnished by the worker for the work are substantial. Consider the factors below to make a determination:

  • Are the facilities being purchased or leased at fair market or fair rental value?

  • Are the facilities furnished by the worker considerably more extensive than those usually furnished by other workers performing comparable services?

  • Are the facilities furnished essential to the work or are they for the personal convenience of the worker?

  • What is the value of the worker's investment compared to the total investment?

F. Facilities for statutory employees

Facilities include a place to work, storage space, equipment, machinery, and office furniture. When determining whether the facilities furnished represent a substantial investment, consider such expenses as an office, store, showroom, warehouse, administrative services, and utilities. Generally, a salesperson who maintains an office in his or her own home does not have a substantial investment, but one who maintains an office outside of the home frequently has a substantial investment in facilities.

Facilities do not include:

  • a vehicle for the worker's own transportation;

  • education, training, or experience;

  • tools, equipment, or clothing usually provided by employees; or

  • transportation facilities to carry the goods or commodities or to supply laundry or dry-cleaning services.

G. Continuing relationship

Statutory employees perform work in a continuing nature when the work is:

  • regular or frequently recurring;

  • regular part-time (such as 2 days a week); or

  • regular seasonal employment.

A single-job transaction, even though it takes considerable time, is not generally a continuing relationship.

H. References

  • IRS Publication 15, (Circular E) Employer’s Tax Guide

  • IRS Publication 15-A, Employer’s Supplemental Tax Guide

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RS 02101.300 - Statutory Employees - 01/06/2012
Batch run: 07/03/2014