TN 4 (01-10)

Citations:

Section 210(a)-(b) of the Social Security Act [42 U.S.C. § 410(a)-(b)]

A. Background

Social Security coverage is provided to individuals who work in “employment” under the original Social Security Act (the Act) of 1935. Section 210 (a) of the Act defines “employment” as services of an employee for his or her employer, with a number of listed exceptions. The term “employee” was not defined in the original Act or the pertinent sections of the Internal Revenue Code, except that both laws specified that the term “includes an officer of a corporation.”

In 1936 and 1937, the Internal Revenue Service and the Social Security Administration issued regulations clarifying the meaning of the term “employee.” Under these regulations, an individual was an employee “if under the usual common-law rules the relationship between him and the person for whom he performs services is the legal relationship of employer and employee.” In general, under the common-law rules, an individual is an employee if the person receiving the services has the right to direct and control the individual and the details and means used to perform those services. While an individual's status as an employee or self-employed individual is obvious in the majority of cases, borderline cases can be difficult to resolve.

B. Court decisions

In the years after 1937, courts decided numerous cases on employer-employee relationships. Some interpreted the common-law definition of an employee very liberally, while others were more restrictive. In order to resolve the conflicting opinions, the Supreme Court took jurisdiction of several cases. In June 1947, three decisions interpreted employer-employee relationships under the Social Security Act. In general, the Supreme Court took a rather liberal view in its interpretation.

Based on the decisions of the Supreme Court, the Treasury Department and the Federal Security Agency (which became the Department of Health and Human Services) prepared new regulations in accordance with the reasoning of the Court.

Under the proposed regulation, an employee was defined as “an individual in a service relationship who is dependent, as a matter of economic reality, on the business to which he or she renders service and not on his or her own business as an independent contractor.” The proposed regulations considered other factors, in addition to the degree of control exercised over the individual, to determine if the individual was an employee. The other factors considered were the integration of the individual’s work in the business and his or her investment in the facilities for work.

C. Congressional action

Public Law 642 amended the definition of “employee” to provide the common-law rules in determining the employer-employee relationship.

D. Expanded definition under present law

The 1950, and subsequent amendments to the Social Security Act, continue to use the common-law rules in determining employer-employee relationships. In enacting the 1950 amendments, Congress expressed the view these rules be applied realistically, not restrictively. Congress also included, in addition to common-law employees, people who perform service under specified conditions in four occupational groups. Congress recognized that some people in these specified occupations might be employees under the usual common-law rules and intended to bring those who were not into the Social Security program as employees rather than under the new self-employment provisions.

Congress intended that the tests for determining employment relationships under the common-law concept of master and servant should not be narrowly applied.

SSA considers this conclusion especially significant since these amendments would cover most self-employed persons not covered as employees. By applying a broad interpretation of the tests for determining employment relationships, more borderline case decisions would favor employment rather than self-employment. This view appears more consistent with the legislative purpose of the Social Security Act.

SSA also considers that the issue of whether an employment relationship exists relies on whether the person receiving the services has the right to control the worker, along with the manner and means of the performance of the services to a degree sufficient to establish an employer-employee relationship under the usual common-law rules. Therefore, development of this issue is directed toward establishing the existence or lack of existence of factors indicating whether such control exists. This statement indicated that the factors to use in deciding questions of employer-employee relationships are those that are pertinent to the end-point determination of whether there is common-law control.

E. Legislation affecting Social Security tax collections

Employer-employee relationship questions continue to be troublesome. Businesses that concluded that their workers were independent contractors protested to Congress that the IRS had determined that their workers were employees and assessed Social Security taxes on that basis. Businesses also protested that the common-law rules are too subjective to permit a business to determine a worker’s employment status. As a result, Congress enacted legislation (Section 530 of P.L. 95-600, the Revenue Act of 1978) that precludes the IRS from assessing Social Security taxes under certain conditions. Generally, the business needs a reasonable basis for considering the worker to be an independent contractor and must file Federal tax forms accordingly. See RS 02101.808 for more information about this provision.