A simplified test of independent contractor status that replaces the previous IRS Twenty Factor test. The test considers behavior control, financial control and relationship of the parties. Behavior control requires independent contractors to be free from client control of how they complete their work. Financial control focuses on the business aspects of the relationship, such as whether the workers have a significant investment in their business, an opportunity for profit or loss and how they are paid. Relationship of the parties focuses on how the parties perceive their relationship and considers such factors as the presence or absence of a contract, access to benefits and ability to terminate the relationship. According to the IRS, the Three Factor Test is only an analytical tool. The legal test of whether an individual is an employee or an independent contractor is whether there is “a right to direct and control the means and details of the work,” which the Three Factor Test attempts to make more explicit. (See also: Independent Contractor.)
Source: Staffing Industry Analysts