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Concept Understanding: Are My Tutors Employees or Contractors?

contractor tutor Dec 29, 2021

The business of education can be complex when it comes to human capital management. The classic question is "should I treat my tutor as an employee or as an independent contractor?"

There are clear federal guidelines (included later) which can help us understand the central issue of control. Still, those guidelines are often, if not always, superseded by state employment law.

To make matters more challenging, the laws can change based on state and federal legislation

Having said all of that, here is a quick look at key benefits to "employing" your tutors:

Quality

When employing someone you can train them on your methods, set expectations for product delivery, schedule them to deliver your service, and review their performance on a regular basis.

Consistency

Setting the time for tutoring sessions, the material to be used, the method of delivery, and the location for the lesson are all elements that are under an employer's control. As such, an employer has more influence over the parent-tutor relationship and by implication overall quality control.

Control

As of the writing of this article, in an employer-employee relationship, the relationship with an employee is generally "at will" which means the employer can terminate the employment relationship with our without cause. I say "generally," because the rules can vary by state. Please check with your state's Department of Labor before making a final decision.

Assuming your state is an "at will" state, employers have additional latitude to require things such as Non-Compete and Non-Disclosure agreements. These are particularly important if the employer has IP, client lists, or proprietary processes you don't want exposed to competitors.

The "Employment Model" is ideal if when the product revolves around IP such as internal training, the use of proprietary content, or the delivery of a proprietary methodology. Basically, if you have great methods, content, and tutors, employing that team is a good choice.

Here are the benefits of Contracting your tutoring team:

Expense Reduction

Generally speaking, companies who contract their workforce will save between 15%-25% on each and every payroll dollar. This includes any compensation that flows through the payroll system to the tutor--including such things as bonuses.

This benefit alone is sometimes enough to warrant serious consideration (Varsity Tutors made it the foundation of their business model).

Less Control but Less to Worry About

Here is the big distinguishing factor: one's ability to use a contract workforce is inversely related to one's ability to control that workforce. Generally speaking the business loses the ability to: schedule the tutoring session, require a specific study plan, or dictate what books & materials to use.

In essence, under the Independent Contractor Model, the primary role of the company is to connect the tutee with the tutor. The tutor should then schedule the sessions and deliver the tutoring.

This Contractor Model is an ideal choice if the product is based on a well-defined workflow with a defined hand-off to a trustworthy and expert tutor.

There are of course nuances and exceptions to the above which we'll go into another time. Until then, here is a primer on Federal Employment Law:

The IRS test often is termed the “right-to-control test” because each factor is designed to evaluate who controls how work is performed. Under IRS rules and common-law doctrine, independent contractors control the manner and means by which contracted services, products, or results are achieved. The more control a company exercises over how, when, where, and by whom work is performed, the more likely the workers are employees, not independent contractors. There are 20 criteria the IRS uses to make a determination.

A worker does not have to meet all 20 criteria to qualify as an employee or independent contractor, and no single factor is decisive in determining a worker’s status. The individual circumstances of each case determine the weight IRS assigns different factors.

NOTE: Employers uncertain about how to classify a worker can request an IRS determination by filing Form SS-8, “Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” However, some tax specialists caution that IRS usually classifies workers as employees whenever their status is not clear-cut. In addition, employers that request an IRS determination lose certain protections against liability for misclassification.

The common law test

The common law test: IRS examiners use the 20-factor common law test to measure how much control you have over the worker. These factors are reflected on IRS Form SS-8, (this form can be downloaded at www.irs.gov)“Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding.”

You can fill out the SS-8, including the facts of your relationship with the worker, and submit it to the IRS to get a determination of whether the worker is your employee or not.

The reasonable basis test

The reasonable basis test is considered a “safe harbor.” That is, if you can show you had a reasonable basis for treating a worker as an independent contractor, the IRS is prohibited from reclassifying the worker as your employee either prospectively or retroactively. You have a reasonable basis for treating a worker as an independent if one or more of the following conditions exist:

A court ruling in favor of treating workers in similar circumstances as non-employees;
A ruling by the IRS (usually a Revenue Ruling) stating that similar workers are not employees subject to employment taxes;
An IRS Technical Advice Memorandum or Private Letter Ruling issued to your company, indicating that the particular worker isn’t an employee;
A past IRS payroll audit that didn’t find workers in similar positions at your company to be employees; or
A longstanding, widely recognized practice in your industry of treating similar workers as independent contractors.

NOTE: The Treasury Inspector General for Tax Administration has recommended that IRS pursue legislative proposals that would mandate withholding of income taxes on payments made to independent contractors and require monthly estimated tax payments. TIGTA made these recommendations in order to curtail estimated tax payment

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