Rev. Rul. 75-41

Advice has been requested whether a corporation furnishing individuals to various professional people and firms, under the circumstances described below, is the employer of the individuals 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).

A physician's professional service corporation is in the business of providing a variety of services to professional people and firms (subscribers), including the services of secretaries, nurses, dental hygienists, and other similarly trained personnel. It enters into contracts with the subscribers under which the subscribers specify the services to be provided and the fee to be paid to the corporation for each individual furnished. Subscribers have the right to require that an individual furnished by the corporation cease providing services to them, and they have the further right to have such individual replaced by the corporation within a reasonable period of time, but the subscribers have no right to affect the contract between the individual and the corporation. The contracts also provide that the corporation has the right to remove or reassign any personnel furnished to subscribers but that it will, in such cases, either furnish a replacement promptly or adjust the fee to compensate for the vacancy created.

The individuals who are to perform the services are recruited by the corporation and given various tests to determine their qualifications and degrees of skill. The corporation hires the personnel, pays their wages, and provides them with liability and unemployment insurance, workmen's compensation, and other benefits. Under the contract with the corporation, the individuals agree to be available to perform services for any subscribers to which they are assigned. The contract sets forth the amounts to be paid to the individuals. The fee that the corporation charges to the subscribers is based on a predetermined mark up formula. The corporation has the right, under the contract, to evaluate the performance of the individuals and to discharge them if the evaluation shows that they are failing to satisfactorily perform the services contracted for by the subscribers. Individuals who enter into contracts with the corporation agree that they will not contract directly with any subscriber to which they are assigned for at least three months after cessation of their contracts with the corporation.

When the corporation considers an individual qualified to meet a subscriber's request, the corporation assigns the individual to the subscriber to work on the subscriber's premises with the subscriber's equipment. The corporation instructs the individual as to his work hours and the nature of his duties, based on the subscriber's request for that particular type of individual and the hours he is to work. Subscribers rely on the corporation to see that the individual meets the qualifications they require and give the individual no further tests.

For purposes of Federal employment taxes the usual common law rules ordinarily apply in determining whether the employer-employee relationship exists and, if so, who is the employer. The regulations generally identifying who are employers speak of them as persons who employ employees (section 31.3121(d)-2 and 31.3306(a)-1 of the Employment Tax Regulations) and as any person for whom services are performed as an employee (section 31.3401(d)-1 of the regulations). The regulations require the finding of a legal relationship of a contractual nature that may be examined to determine whether it comprises a common law employer-employee relationship.

Guides for determining whether the legal relationship between the parties involved is an employer-employee relationship are found in sections 31.3121(d)-1, 31.3306(i)-1, and 31.3401(c)-1 of the regulations. These sections provide that, generally, the relationship 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 the result is to be 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.

In the instant case, the individuals have entered into contracts with the corporation under which the latter has the right to control and direct the performance of their services for the corporation's subscribers and the right to discharge them should they not satisfactorily perform those services. Accordingly, it is held that the corporation is the employer of the individuals for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages.