Rev. Rul. 65-165

The Internal Revenue Service has been asked to determine whether blind individuals who perform services in their homes, or in a sheltered workshop operated by the X Association for the Blind, are employees of the Association for Federal employment tax purposes. The Association, which alleviates problems resulting from blindness and rehabilitates blind individuals, is a charitable organization described in section 501(c)(3) of the Internal Revenue Code of 1954, and is exempt from income tax under section 501(a) of the Code. The Association has filed a Form SS-15, Certificate Waiving Exemption from Taxes, and services performed in its employ are not excepted from employment by section 3121(b)(8)(B) of the Federal Insurance Contributions Act (chapter 21, subtitle C, Internal Revenue Code of 1954). Under section 3306(c)(8) of the Federal Unemployment Tax Act (chapter 23 of the Code), however, the services are excepted from employment as defined therein. The services of the blind individuals are in three classes, each of which is discussed separately.

Class 1. Individuals in training .-Blind individuals are given orientation and training in a sheltered workshop operated by the Association as part of a rehabilitation program designed to prepare them for placement in private industry. During the training period, which averages 16 weeks in length, hours of work may be limited at first by an individual's capacity to work, but the intent is to accustom the individual to industrial working conditions. The training is accompanied by such counseling, or other treatment, as may be needed. Although the trainees receive certain allowances during this period, an employment relation is not intended and the trainees are not eligible for the benefits which are available to recognized employees in the workshop.

Section 3121(d) of the Federal Insurance Contributions Act provides, among other things, that the term `employee' means any individual who has the status of an employee under the usual common law rules applicable in determining the employer-employee relationship. The guides for determining whether an employer-employee relationship exists under these rules are found in section 31.3121(d)-1(c) of the Employment Tax Regulations. These rules also apply in determining whether an employer-employee relationship exists for purposes of the Federal Unemployment Tax Act and the Collection of Income Tax at Source on Wages.

In the process of training blind individuals, the Association supervises and directs the trainees in order to rehabilitate and protect them. There is no agreement to form an employment relationship, however, and there is not that degree or kind of direction and control which is necessary to establish an employer-employee relationship under the unual common law rules.

Accordingly, the blind individuals are not employees of the Association for Federal employment tax purposes while they are being trained by the Association.

Class 2. Regular workshop employees .-A blind individual who has completed the training and who is capable of performing one or more of the wide range of jobs offered by the Association in its sheltered workshop may continue to work in the workshop temporarily if he is awaiting placement in private industry or permanently if he is unable to compete in regular industry. For these individuals, the Association provides working conditions and pay scales comparable to those in private industry, and fixes working hours and production schedules. An employment relationship is intended, and the workers are eligible for employee benefits such as vacations and bonuses. The workers may be discharged if their work is not satisfactory. The Association exercises the degree and kind of direction and control over the workers which is necessary to establish that relationship under the usual common law rules. Accordingly, the trained workers in the sheltered workshop are employees of the Association for Federal employment tax purposes. See Revenue Ruling 54-253, C.B. 1954-2, 324, in which the Arizona Industries for the Blind was held the employer of visually handicapped individuals in its workshops.

Class 3. Individuals working at home .-Blind individuals who are incapable of working in the workshop, but who are able to produce salable articles, are furnished materials from which they may produce the articles at home. A representative of the Association delivers the materials, provides instructions, and pays for any completed articles which the individuals wish to sell to the Association. The individuals may work when they please without being bound by production schedules, and may sell the articles wherever they please. The Association requires only that the articles either to the public or to the No employment relation is intended, and the work is provided primarily for therapeutic purposes.

Under these circumstances, the Association does not exercise, or have the right to exercise, over these individuals the degree of direction and control necessary to establish an employer-employee relationship under the usual common law rules. Moreover, the individuals are not employees under the provisions of section 3121(d)(3)(C) of the Federal Insurance Contributions Act pursuant to which certain homeworkers are employees for purposes of that Act. That section is inapplicable because the individuals are free to sell the completed articles either to the public or the Association.