Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 67-18

1967-1 C.B. 282

IRS Headnote

`Design engineers' are engaged by a company to design dies. They perform personal services on a continuing basis; they are given instructions regarding processing and process changes; they are furnished materials and supplies; their services are performed primarily on the company's business premises; they perform services required under the purchase orders issued to the company by its customers; and the company retains the right to discharge them at any time. Held , the design engineers are employees of the company for Federal employment tax purposes.

Full Text

Rev. Rul. 67-18

The Internal Revenue Service has been requested to determine whether individuals employed by a company to design dies are employees of the company for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages (chs. 21, 23, and 24, respectively, subtitle C, Internal Revenue Code of 1954).

The company is engaged in the business of designing dies and does considerable work for the automobile industry. In some cases the company contracts with an automobile manufacturer to complete a particular design job on a time and material basis. In most cases, however, it obtains jobs on a fixed-fee basis as a result of competitive bidding.

When the company receives a purchase order for a job on a fixed-fee basis, it is usually inexpedient for it to be fulfilled by its employees who are paid by the hour because of the nature of the work and the time limitation relating thereto. Consequently, the company enters into written contracts with die designers, known in the industry as `design engineers,' who are experienced in the work and therefore perform the jobs with greater competence and dispatch. The contracts refer to the `design engineers' as independent contractors.

Generally, the work is not made available to the `design engineers' on a competitive bidding basis. Since most of the designers specialize in particular design work, the company usually offers to pay a designer a specified price (usually a percentage of the price the company is to receive) to do a particular job with which he is familiar. If the designer agrees to complete the job for the price specified, or if through negotiations the company and designer agree on a price that is mutually satisfactory, the designer receives a written purchase order for that particular job, which supplements the written contract which he has previously entered into with the company.

The designers are given keys to the company's business premises and may come and go as they please. They are not required to observe regular working hours or to work a specified number of hours a day or week but they must meet a job completion date set by the company's customer.

The company provides the designer with desk space, drafting boards, light, heat, and telephone at its business premises and furnishes the materials and supplies necessary to do the work. The designers primarily perform the services on the company's premises, since it is a requirement under the company's purchase orders with its customers that the customers' blueprints must not be taken off the company's premises. On occasion a designer may perform some of the work in his home, for his own convenience, when blueprints are not required, but this is not customary or typical.

The contracts between the `design engineers' and the company do not provide for assignment of the purchase order by the designers to anyone else and it is generally expected that they will personally execute the work. Since they are experienced in the work, they are only given a brief description of the nature of the work required. The company's followup man does not supervise them but does instruct them in regard to processing and any process changes which may occur. Upon completion of a particular job, a company representative checks to see if the work is accurate and in accordance with its customer's requirements and standards. If the work is found to be defective, the designer is required to correct or replace the work without any additional compensation.

The designers are usually paid the agreed upon price at the completion of each job; however, they may apply for and receive partial payments as the work progresses. If a designer's services are unsatisfactory, the company retains the right to discharge him at any time.

The designers work on a continuing basis for the company, provided work is available. Some designers do perform similar work for others in their spare time.

The design engineers are employees for Federal employment tax purposes if they have the status of employees under the usual common law rules applicable in determining the employer-employee relationship. Guides for determining that status are found in three substantially similar sections of the Employment Tax Regulations; namely, sections 31.3121(d)-1(c), 31.3306(i)-1, and 31.3401(c)-1.

Section 31.3121(d)-1(c) of the regulations provides, in part, that generally the relationship of employer and employee exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so. The right to discharge is also an important factor indicating that the person possessing that right is an employer. Other factors characteristic of an employer, but not necessarily present in every case, are the furnishing of tools and the furnishing of a place to work, to the individual who performs the services.

Whether an employer-employee relationship exists depends upon the particular facts in each case. The design engineers in this case perform personal services on a continuing basis; they are given instructions regarding processing and process changes; they are furnished materials and supplies; their services are performed primarily on the company's business premises; their services are both necessary and incident to the business conducted by the company, since they perform services required under the purchase orders issued to the company by its customers; and the company retains the right to discharge them at any time.

Although the design engineers may be extremely well qualified to perform the work without detailed supervision and do perform services with considerable freedom of action, these facts are not controlling in reaching a decision as to their employment status since the ultimate test for determining whether there is an employment relationship is whether the person for whom the services are performed retains the right to exercise direction and control over them in the performance of their services . Upon the basis of the facts stated, the company exercises, or has the right to exercise, such direction and control over the `design engineers' in the performance of their services as is necessary to establish the relationship of employer and employee under the usual common law rules. If the relationship of employer and employee exists, the designation or description of the relationship by the parties as anything other than that of employer and employee is immaterial. See section 31.3121(d)-1(a)(3) of the regulations.

Accordingly, the `design engineers' performing services for the company under the circumstances described above are employees of the company for Federal employment tax purposes.