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October 24, 2019
2019-1892

Arkansas law adopts IRS 20-factor test for worker classification

Under recently enacted HB1850, the Employer Independent Contractors Act of 2019, Arkansas law adopts the IRS 20-factor test outlined in Revenue Ruling 87-41 (1987-1 C.B. 296) for determining employment status for wages, income tax withholding and workers' compensation insurance purposes. The law also replaces the prior ABC test that applied for unemployment insurance purposes with the IRS 20-factor test.

Details

Under the Arkansas law as amended, an employer or agency charged with determining the employment status of an individual is required to consider the following 20 factors provided by the IRS in Revenue Ruling 87-41:

    1. A person for whom a service is performed has the right to require compliance with instructions, including without limitation when, where, and how a worker is to work
    2. A worker is required to receive training, including without limitation through:

(A) Working with an experienced employee

(B) Corresponding with the person for whom a service is performed

(C) Attending meetings or

(D) Other training methods

  1. A worker's services are integrated into the business operation of the person for whom a service is performed and are provided in a way that shows the worker's services are subject to the direction and control of the person for whom a service is performed
  2. A worker's services are required to be performed personally, indicating an interest in the methods used and the result
  3. A person for whom a service is performed hires, supervises, or pays assistants
  4. A continuing relationship exists between a worker performing services and a person for whom a service is performed
  5. A worker performing a service has hours set by the person for whom a service is performed
  6. A worker is required to devote substantially full time to the business of the person for whom a service is performed, indicating the person for whom a service is performed has control over the amount of time the worker spends working and by implication restricts the worker from obtaining other gainful work

(A) The work is performed on the premises of the person for whom a service is performed, or the person for whom a service is performed has control over where the work takes place

(B) A person for whom a service is performed has control over where the work takes place if the person has the right to: (i) compel the worker to travel a designated route; (ii) compel the worker to canvass a territory within a certain time; or (iii) require that the work be done at a specific place, especially if the work could be performed elsewhere

  1. A worker is required to perform services in the order or sequence set by the person for whom a service is performed or the person for whom a service is performed retains the right to set the order or sequence
  2. A worker is required to submit regular oral or written reports to the person for whom a service is performed
  3. A worker is paid by the hour, week, or month except when he or she is paid by the hour, week, or month only as a convenient way of paying a lump sum agreed upon as the cost of a job
  4. A person for whom a service is performed pays the worker's business or traveling expenses
  5. A person for whom a service is performed provides significant tools and materials to the worker performing services
  6. A worker invests in the facilities used in performing the services
  7. A worker realizes a profit or suffers a loss as a result of the services performed that is in addition to the profit or loss ordinarily realized by an employee
  8. A worker performs more than de minimis services for more than one person or firm at the same time, unless the persons or firms are part of the same service arrangement
  9. A worker makes his or her services available to the general public on a regular and consistent basis
  10. A person for whom a service is performed retains the right to discharge the worker
  11. A worker has the right to terminate the relationship with the person for whom a service is performed at any time he or she wishes without incurring liability

Ernst & Young LLP insights

This Arkansas legislation bucks a trend of progressive states, sparked by California, to stem the rise of gig workers by imposing a more stringent three-fact test (ABC test) for worker classification. (See EY Payroll Newsflash, Vol. 20, 142, 9-13-2019.)

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Contact Information
For additional information concerning this Alert, please contact:
 
Workforce Tax Services - Employment Tax Advisory Services
   • Kenneth Hausser (kenneth.hausser@ey.com)
   • Debera Salam (debera.salam@ey.com)
   • Kristie Lowery (kristie.lowery@ey.com)

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