CONTROL & DIRECTION OF INSTRUCTORS

DETERMINES EMPLOYEE TAX STATUS

U.S. INTERNAL REVENUE SERVICE, REVENUE RULING 70-338
Rev. Rul. 70-338; 1970-1 C.B. 200
January, 1970

This Revenue Ruling considered the federal employment tax status of two types of music teachers: (1) teachers instructing regular classes at a music conservatory for regular remuneration and; (2) teachers who instruct pupils in private lessons in return for a percentage of the fees collected by the conservatory." Specifically, the issue was "whether certain teachers performing services at a music conservatory under the circumstances described below are employees of the conservatory, for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages," i.e., social security, unemployment insurance, and employer withholding of federal taxes on wages earned by employees. The facts of the case were as follows:

The teachers perform the services under two different arrangements - (1) as instructors of technical classes for a regular remuneration, and (2) as instructors of their own pupils in private lessons for the amount of tuition fees collected by the conservatory from the pupils, minus a specified percentage retained by the conservatory.

The teachers in group (1) are engaged in the instruction of the regular classes of the conservatory. They must spend certain designated hours in the conservatory each day instructing the classes, conducting examinations, and performing such other duties as the conservatory may from time to time impose upon them.

Under each contract between the teachers in group (2) and the conservatory, the conservatory agrees to furnish a studio for the teacher's use, to insert the name of the teacher and the tuition fee agreed upon in the catalogue of the conservatory, to register on its books all persons applying for instruction from the teacher, to keep a proper record of the lessons given and the charges made by the teacher therefor, and to use its best efforts to collect all tuition charges made by the teacher.

The teacher agrees not to teach elsewhere within the city limits without the consent of the conservatory and to allow the conservatory to retain a specified percentage of the amount collected from his pupils, guaranteeing that the portion so retained will amount to a specified sum. In the case of an outstanding teacher, the conservatory may pay him the full amount of the tuition fees collected from his pupils and receive from the teacher a fixed yearly payment. The teacher may not be dismissed during the life of the contract but the conservatory may refuse to renew the contract upon its expiration. The conservatory does not guarantee to furnish any students to the teacher. Approximately 80 percent of all students enroll as a result of the teacher's activities. All teachers in this group are required to have and enroll a certain number of students before joining the staff.

The conservatory has no control over the teachers in group (2) as to the time or manner in which the lessons are given by them. However, it requires that certain fixed standards be maintained, which standards are judged at recitals by a committee appointed by the teachers. The teachers have and exercise the right to reject any students assigned to them or any one of their own students who does not possess the ability to do the work satisfactorily.

The tuition fees collected by the conservatory pursuant to its agreements with the teachers are deposited in a trust account that is separate and distinct from the regular corporate account in which income arising from the operation of the conservatory is deposited.

No refund of any tuition fees collected by the conservatory is made to any student without the consent of the teacher. Periodically the funds in the trust account are allocated to the teachers in accordance with the terms of their contracts with the conservatory and the portion due the conservatory is transferred to its regular corporate account.

The student following of each teacher is usually brought with him when he joins the staff of the conservatory and taken with him when he leaves. Notwithstanding frequent changes of teachers, the student following of one teacher can not be diverted to another.

As described by the IRS, the following regulations provided "guides for determining the employer-employee relationship" (Employment Tax Regulations sections 31.3121(d)-1, 31.3306 (i)-1, and 31.3401(c)-1. Section 31.3121(d)-1(c)):

Every individual is an employee if under the usual common law rules the relationship between him and the person for whom he performs services is the legal relationship of employer and employee. Generally such relationship exists when the person for whom 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 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.

Applying these regulatory guidelines to those instructors receiving regular remuneration for teaching regular technical classes, the IRS held that "the conservatory has sufficient right to direct and control the manner of performance of services by the teachers in group (1) as prescribed by the regulations to establish the relationship of employer and employee, for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages."

Conversely, the IRS found that "the conservatory does not exercise, or have the right to exercise, over the teachers in group (2) the degree of direction and control necessary to establish an employer-employee relationship under the usual common law rules."

The facts show that each contract between the conservatory and the teachers in group (2) contemplates the performance by the conservatory of certain administrative and operative services in return for a specified percentage of the tuition fees collected for the teachers by the conservatory. Although the conservatory insists upon the maintenance of certain musical standards, it has no right of control over the manner in which the teacher conducts his private lessons or gives instruction. The acceptance, refusal, or dismissal of his pupils is determined by the teacher and no refunds of any fees collected by the conservatory are made without the consent of the teacher. The conservatory in some instances performs its services for a fixed yearly amount in lieu of a percentage of tuition fees and in all cases treats the tuition fees collected by it as property held in trust for the teachers.

Accordingly, the IRS concluded that "the teachers in group (2) are not employees of the conservatory for purposes of the Federal Insurance Contributions Act, the
Federal Unemployment Tax Act, or the Collection of Income Tax at Source
on Wages."