Rev. Rul. 55-695

The Internal Revenue Service has been requested to determine the status, for purposes of the Federal Insurance Contributions Act (chapter 21, subtitle C, Internal Revenue Code of 1954), of an individual who, upon reaching retirement age, was retained by her `former' employer as a consultant on a retainer fee basis for the purpose of training a replacement for her job.

The individual had worked as an employee of the company for many years and was thoroughly familiar with all the details of her work. When she attained retirement age, the company desired, because of her knowledge of the work, to retain her services for an extended period of time for the purpose of training a replacement. An agreement entered into between the individual and the company provided that she was to be engaged as an independent contractor to serve in the capacity of a consultant; that she would devote all of her knowledge, skill and working time solely to the business and other interests of the company; and that she would be paid a retainer fee payable in equal monthly installments. The company agreed to reimburse her for amounts paid out for expenses incurred in its behalf. She agreed not to incur any extraordinary expenses without company approval. Deductions from her fee would be made for periods of absence on account of illness or other causes. The contract was terminable by the company upon 30 days written notice for performance not in keeping with the terms of the contract. The individual worked exclusively for the company on its premises and was furnished office space, office equipment, telephone, stationery, etc., without charge. She worked under the general direction of the company's office manager but did not require supervision in the details of her work in view of her past experience on the job. The services performed were the same as those performed by her prior to her attainment of retirement age, except that at the same time she was occupied in training a replacement for her job.

Section 3121(d) of the Act provides, among other things, that the term `employee' means any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee.

Whether a person is an independent contractor or an employee is largely a question to be determined under the particular facts in each case. The guides for determining, under the usual common law rules, whether an employer-employee relationship exists are found in section 408.204(c) of Regulations 128, applicable to the provisions of the Internal Revenue Code of 1954 by virtue of Treasury Decision 6091, C.B. 1954-2, 47.

Section 408.204(a) of Regulations 128, supra , provides that if the relationship of employer and employee exists, the designation or description of the relationship of the parties as anything other than that of employer and employee is immaterial. Thus, if such relationship exists, it is of no consequence that the employee is designated as a partner, coadventurer, agent, independent contractor, or the like. Hence, although the contract stipulated that the relationship of the parties would be that of principal and contractor, such designation of the parties in interest as to their relationship may be accepted only if warranted by the facts in the case.

Under the circumstances states, it is apparent that the individual performed, on a continuing basis, personal services of the type normally performed by an employee for a business firm, and that the company either exercised, or retained the right to exercise, over her the direction and control necessary to establish the relationship of employer and employee. Accordingly, it is held that the individual was an employee of the company for Federal employment tax purposes for the period during which she served the company as a consultant subsequent to her attainment of retirement age