Rev. Rul. 74-389

Advice has been requested whether salesmen performing services, under the circumstances described below, are employees 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, subtitle C, Internal Revenue Code of 1954.)

The salesmen are engaged by a company to sell yachts and ships listed with it. Their agreements with the company contemplate that all of the salesmen's services will be performed performed by them personally and provide that the company will make available to them all of its current yacht and ship listings. The salesmen are free to solicit prospective buyers and listings at their own discretion. The agreements may be terminated at any time by either party, upon written notice.

The salesmen perform their services both on the company's premises and at home, and are not required to follow a daily or weekly routine or to work any regular hours or at any specified time. Except for reporting to the company about yachts and ships they are trying to sell, they are not required to report in person, by telephone, in writing, or otherwise. However, in order to equitably allocate inquiries addressed to the company to all of the salesmen, they are encouraged to schedule their work at the office part of the time. Periodic meetings of the salesmen are scheduled for the purposes of interchanging information and reviewing new listings, but attendance at such meetings is not mandatory.

The salesmen are not restricted to a specific territory and have the right to obtain listings or sell yachts and ships listed with the company wherever the customer, owner, or ship may be located. They are not given instructions or training and are not required to meet a minimum sales quota.

The salesmen are compensated on a commission basis and are not entitled to any advance or draw against commissions or eligible for any bonuses, pensions, or sick pay. The company does not establish the price, terms, or conditions of a sale and the salesmen have full authority to participate in the negotiations of selling prices and terms acceptable to the listing owners and prospective buyers. However, the salesmen do not have the authority to reduce the normal commission basis without the company's consent and if they should do so the reductions are deducted entirely from their portion of the commission.

The salesmen operate under the company's name, are not available to others to do work of a similar or related nature, do not ordinarily advertise, and do not maintain offices in their own homes. They are required to be licensed by the State in which they transact business and, unless otherwise agreed upon, they pay for their own licenses, renewal fees, travel and entertainment expenses, business cards, and other work related expenses.

An individual is an employee for Federal employment tax purposes if he has the status of employee 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, 31.3306(i)-1, and 31.3401(c)-1. As stated in the regulations, 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 work 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 a 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. In general, if an individual is subject to the control of 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.

Under the facts in this case, the company does not exercise or have the right to exercise over the salesmen in the performance of their services such control as is necessary under the common law rules to establish the relationship of employer and employee. Accordingly, the salesmen are not 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.

Furthermore, the salesmen are engaged in a "trade or business" for purposes of the Self-Employment Contributions Act of 1954 (chapter 2, subtitle A of the Code), the income from which should be considered in computing net earnings from self-employment as contemplated by that Act and in determining whether they are required to file declaration of estimated income and self-employment tax returns under sections 6015 and 6017, respectively, of the Code.