Rev. Rul. 75-269

Advice has been requested whether, under the circumstances described below, individuals performing services are employees of a company for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages (chapters 21, 23, and 24, respectively, subtitle C, Internal Revenue Code of 1954).

The company is engaged in the business of baking and distributing its products to retailers. The distribution operation is handled by certain individuals the company engages as distributors pursuant to oral contracts. Each distributor owns his own territory either as a result of having developed it personally or by having purchased it from a predecessor distributor; or having been assigned a territory by the company after placing a security deposit with the company. In every instance the distributors receive an exclusive right from the company to distribute its baked goods in their particular territories.

Each new distributor is provided with a training period that usually does not exceed one week. All such training is in the form of on-the-job training during which time a district sales representative or the predecessor distributor accompanies the new distributor on the sales route.

The company furnishes its distributors with leads, but does not require that they be followed up, suggests the retail prices for its products, requires that the distributors date all products, and that all products be removed from retailers shelves on that date to insure freshness. The products that are so removed are a loss item to the distributors, except that the company allows a one-half price credit for each 100 unit carton that is returned. The distributors are billed for all products supplied and must pay for these products within one week from the date of their delivery. The company will take as payment, cash, check, or authorized charge slips. The authorized charge slips are the accounts receivable that the distributors have with major chain stores. The major chain stores are billed directly by the company. All other accounts receivable are the sole responsibility of the distributors.

The company does not guarantee a minimum amount of compensation, allow drawing accounts, reimburse the distributors for transportation and related expenses, require a minimum quota, or require reports other than the submission of a route sheet on a yearly basis. In the event a distributor's vehicle breaks down the company will furnish a substitute vehicle. Also, a district manager is available to assist a distributor with his route in the event he becomes ill. However, the distributor is responsible for arranging and paying for a replacement when he is on vacation. The company sponsors cash bonus and prize contests, pays for fifty percent of a company uniform if the distributor desires to wear one, and provides a medical insurance program for the distributor, but not his family. A retirement fund is also maintained and financed by the company for the distributors.

Typically, the distributors perform their services personally, and with respect to the actual delivery of the products, do not hire assistants. Part-time assistants may be hired by some distributors to assist them with unloading a delivery from the company, and with pricing and dating the products. Each distributor is expected to furnish and adequately maintain his own vehicle and facilities for storage and ultimate delivery of the products delivered to him. Any products that are damaged while in storage are the liability of the particular distributor. Most distributors maintain offices in their homes. They are furnished with sales pads, charge pads, and settlement sheets, but are required to pay for one half the cost of their display racks. While the distributors are restricted to a specific territory, the frequency with which they cover their territory is based on the needs of their customers. They are expected and encouraged to cultivate and increase the number of their customers through their own efforts.

The distributors operate under their own names as well as under the name of the company. They do not perform similar services for others or advertise that they are able to do so. However, they do maintain a listing in the local directories in their own names as well as in the company's name. The working relationship may be terminated by the company if a distributor fails to pay for a delivery, for drunkenness, or dishonesty. The distributor may terminate the relationship at any time for any reason. The distributors' profits are represented by the difference between the prices they pay the company for the products and the prices at which they sell them to the retailers.

An individual is an employee for Federal employment tax purposes if he has the status of an employee under the usual common law rules applicable in determining the employer-employee relationship. Guides for determining whether that relationship exists are found in three substantially similar sections of the Employment Tax Regulations, namely, sections 31.3121(d)-1, 31.3306(i)-1, and 31.3401(c)-1. Generally, the relationship of employer and employee exists when the person for whom the 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 as to how it shall be done. In this connection, it is not necessary that the employer actually direct and control the manner in which the services are performed; it is sufficient if he has the right to do so. In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result, he is not an employee.

Rev. Rul. 56-129, 1956-1 C.B. 470, concludes, in part, that "dealers" distributing bakery products for a baking company are that company's employees, under the common law rules, for purposes of the Federal employment taxes, including income tax withholding, where they apply to a sales manager for assignment of routes, are given certain training in the route by a route supervisor, are included in the company's group insurance plan and deferred profit-sharing plan, and furnish and maintain their own vehicles. The facts in Rev. Rul. 56-129 show that the route supervisor renders assistance to the dealers at company expense, counsels the dealers whenever he deems it necessary for the good of the company, and is responsible for collecting amounts due the company. Also, the company advises the dealers of telephone orders and of new customers transferring into their district. Weekly and monthly customers are billed on the company's billheads and remittances in most cases are made directly to the company and credited to the dealer's accounts, while daily accounts are collected by the dealers.

However, the facts in the instant case are distinguishable from those in Rev. Rul. 56-129. The company's control and direction is related mainly to the results to be accomplished by their services. For example, the company is concerned that the products, once sold, are properly displayed and removed from the shelves before they become stale. The distributors set their own hours and work routines, do not report to or receive supervision from the company on a regular basis, are not allowed drawing accounts, and pay the expenses related to the conduct of their services. The status of the distributors in this case is further distinguishable from the status of the dealers in Rev. Rul. 56-129, since in this case the distributors receive an exclusive right to distribute the bakery products in their territory, while the dealers in Rev. Rul. 56-129 have their routing continually controlled by a sales manager to whom they must apply for route assignments.

Therefore, in this case, the company does not exercise or have the right to exercise over the distributors the degree of direction and control necessary to establish an employer-employee relationship under the usual common law rules. Accordingly, the distributors are not employees of the company for purposes of the Collection of Income Tax at Source on Wages.

However, section 3121(d)(3) of the Federal Insurance Contributions Act and section 3306(i) of the Federal Unemployment Tax Act (effective with respect to remuneration paid after December 31, 1971, for services performed after such date), provide, in part, that the term "employee" means any individual, other than an individual who is an employee under paragraph (1) and (2) of section 3121(d), referring to officers of corporations and common law employees respectively, who performs services for remuneration for any person as an agent-driver or commission driver engaged in the distribution of bakery products if the contract of service contemplates that substantially all of the services are to be performed personally by such individual. However, an individual shall not be included in the term "employee" under this provision if the individual has a substantial investment in the facilities used in connection with the performance of the services (other than in facilities used for transportation), or if the services are in the nature of a single transaction not part of a continuing relationship with the person for whom the services are performed.

The facts in the instant case show that the distributors perform their services for the company pursuant to an oral contract, on a continuing and full time basis and are expected to perform substantially all of the services personally. They sell products made by the company to retailers who later resell them to their customers. They operate their own vehicles and serve customers that have been designated by the company as well as those solicited by their own efforts, and their compensation is based on the difference between their sales price and the price paid to the company for the bakery products. The distributors do not have a substantial investment in facilities (other than transportation) used in connection with the performance of their services.

Accordingly, the distributors are statutory employees of the company for purposes of the Federal Insurance Contributions Act. With respect to remuneration paid after December 31, 1971, for services performed after that date, they are also employees for purposes of the Federal Unemployment Tax Act.

Rev. Rul. 56-129 is distinguished.