How does my church or religious ministry classify workers as either employees or independent contractors in Arizona?

By June 16, 2020 Church

It is important for religious institutions to properly classify workers as either employees or independent contractor.  Classifying a worker as an employee triggers tax withholding, unemployment, and other requirements that are not relevant when a company hires an independent contractor.

But the determination of whether a worker is an employee or an independent contractor can be complicated and is subject to various factors. The main consideration is the degree of independence or control over the worker.  The more independence a worker has may lead to classifying the worker as an independent contractor. The more control a religious institution exercises over the worker may lead to a determination that the worker is, in fact, an employee.

While there are no clear-cut rules in this area, both Arizona and the federal government have guidance that help in the determination.

Arizona

Arizona utilizes a “right to control” test to determine whether a person is an employee or an independent contractor. The test looks to whether there is a right to control or supervise the methods of obtaining a specific result. The test is based on a “totality of the circumstances” considering several factors, none of which by themselves are conclusive.  The factors include:

  1. The duration of the employment;
  2. The method of payment;
  3. Who furnishes necessary equipment;
  4. The right to hire and fire;
  5. Who bears responsibility for workmens’ compensation insurance;
  6. The extent to which the employer may exercise control over the details of the work, and
  7. Whether the work was performed in the usual and regular course of the employer’s business.

See Hunt Bldg. Corp. v. Indus. Comm’n of Arizona, 148 Ariz. 102, 105, 713 P.2d 303, 306 (1986).

The Arizona Statutes also define “employee” as: “[A]ny individual who performs services for an employing unit and who is subject to the direction, rule or control of the employing unit as to both the method of performing or executing the services and the result to be effected or accomplished.  Indications of control by the employing unit include controlling the individual’s hours of work, location of work, right to perform services for others, tools, equipment, materials, expenses and use of other workers and other indicia of employment….” A.R.S. §23-613.01

Federal law

The IRS has its own test for determining when a person is an independent contractor versus an employee.  It looks at the degree of control and independence in the person’s position and reviews various factors that fall into the categories of:

1. Behavioral

  • Type of instructions given
    • When and where to do the work.
    • What tools or equipment to use.
    • What workers to hire or to assist with the work.
    • Where to purchase supplies and services.
    • What work must be performed by a specified individual.
    • What order or sequence to follow when performing the work.
  • Degree of instruction
  • Evaluation systems
    • Does the evaluation system measure the end result or the details of how the work is performed?
  • Training
    • Does the business provide training on how the job will be done?

2. Financial

  • Significant investment
    • Does the worker significantly invest in the equipment he/she uses or is it provided by the business?
  • Unreimbursed expenses
  • Opportunity for profit or loss
  • Services available to the market
    • Is the worker free to seek out other business opportunities?
  • Method of payment
    • Flat fee or regular wage amount for a period of time

3.Type of relationship

  • Written contracts
  • Employee benefits
  • Permanency of the relationship
  • Services provided as key activity of the business

See     https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee

Conclusion

Religious institutions should use the factors described above to properly classify their workers as either employees or independent contractors.

When a church, ministry, or other nonprofit organization in Arizona needs advice or legal aid in classifying workers, Provident Law’s church and nonprofit attorneys are here to help. We recognize how essential these organizations are to society, and we provide broad transactional and general counsel services to keep them running smoothly. Contact us to learn more.