Name Calling May Not Get You Off The Hook
Department of Labor Says Most Workers Are Employees and Not Independent Contractors.
That position by the Department of Labor (DOL) was clearly stated last July in a far-reaching interpretive memorandum expressing the DOL’s belief that “most workers [classified as independent contractors] are employees under the Fair Labor Standards Act (FLSA) broad definitions.” The impact for employers in general is just labeling a worker as an "independent contractor" and reporting pay via a 1099 does not mean that person IS an independent contractor in the eyes of the DOL.
Many small businesses, as well as some individuals employing domestic help, will need to reevaluate whether a worker is an independent contractor or an employee.
In large measure it is likely that the significant shift by employers, both small and large, to contingent workers (also called independent contractors or free-lancers) is a major factor in this move by the DOL. As evidence of this growing trend, a recent survey conducted by research firm Ardent Partners found that about 30 percent of company workforces are now made up of non-full-time employees, growing to 50% by 2020.
Who Is An Independent Contractor
This movement to independent contractors is accompanied by an expected drop in full and part-time employees to 82% by 2020.
Small businesses will likely continue to expand their use of contingent workers as they adapt to the economy and shifting business priorities. In doing so, it is critical that the definitions and key factors that determine the difference between employees and true contingent workers be fully understood and adhered to.
Small businesses seeking to use freelance talent must distinguish between who is classified as an employee and who is an independent contractor.
The primary area for concern is whether contingent workers can truly be classified as independent contractors by the Department of Labor and the IRS.
Historically, the Department of Labor (DOL) independent contractor criterion was based on the degree to which an individual’s work was controlled by the organization for which he/she performed services. That has now changed.
The DOL has issued a new Administrative Interpretation that applies an “economic realities” test to determine a workers classification as either an independent contractor or an employee. The determination will be based on whether the worker is economically dependent on the employer or actually in business for him or her self. Click here for the complete text of the Administrative Interpretation.
That means that many workers currently classified as Form 1099 independent contractors, but judged to be not truly in business, will need to be reclassified as employees. Of course, such a reclassification would have serious implications for small businesses - and in some instances for individuals employing domestic help - in the form of additional payroll taxes and potentially other benefits expenses. Click here for the DOL blog.
The DOL Administrative Interpretation is admittedly broad. Click here for frequently asked questions relating to individuals employing domestic help.
Six Factors For Employers to Evaluate
Although the factors that constitute the “economic realities” test vary slightly, the DOL interprets them as follows:
• Is the work performed by the individual an “integral part of the employer’s business?” If workers perform services that the company is in the business of providing (workers answering phones at a call center is one example provided in the memorandum), they are more likely to be considered employees.
• Does the individual’s “managerial skill” affect his or her opportunity for profit or loss? A worker, who has the opportunity to hire others or purchase equipment and materials in order to increase profit, is more likely to be considered independent. A worker’s ability to simply work more hours to increase compensation, by contrast, does not reflect managerial skill and does not distinguish a worker as an independent contractor.
• How does the worker’s investment compare to that of the company? Workers should make some significant investments in their business in order to be considered an independent contractor in business for him or herself.
• Does the work performed require special skill and initiative? A worker’s “business skills, judgment, and initiative, not his or her technical skills, will aid in determining whether the worker is economically independent.”
• Is the relationship between the worker and the company permanent or indefinite? A long-term relationship between the parties suggests the worker is an employee. According to the DOL, a worker truly in business for him or herself, “typically works one project for an employer and does not necessarily work continuously or repeatedly for an employer.”
• What is the nature and degree of the employer’s control? “The worker must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his or her own business.” The DOL emphasizes that “the ‘control’ factor should not play an outsized role in the analysis of whether a worker is an employee or an independent contractor… the FLSA covers workers of an employer even if the employer does not exercise the requisite control over the workers, assuming the workers are economically dependent on the employer.”
“In undertaking this analysis, each factor is examined and analyzed in relation to one another, and no single factor is determinative,” the DOL noted. “The ‘control’ factor, for example, should not be given undue weight.”
“The factors should not be applied as a checklist, but rather the outcome must be determined by a qualitative rather than a quantitative analysis,” the DOL stated. That means the test is highly subjective with no objective criteria for employers to count on.
Under the DOL’s scrutiny of the six factors, positions frequently considered as independent contractors—such as carpenters, construction workers, electricians and some domestic/household workers—may no longer qualify as independent contractors.
Employers should maintain detailed records of those workers considered by the employer to be independent contractors, e.g., work agreements, licenses, scope of work, length of engagements and communications with the contractor.
Additionally rights or access typically reserved for employees should not be made available to contractors, e.g. email accounts, employee meetings, etc. Periodically employers are wise to review contractor functions to ensure that they have not crossed the line and be deemed employees.
The DOL Administrative Interpretation is just that … the DOL’s opinion regarding the law on the independent contractor vs. employee issue. While not the law, it is significant because courts often respect an agency’s interpretation of a statute or regulation that the agency is responsible to enforce.
Clearly, the memorandum signals the DOL’s intention to aggressively pursue enforcement actions against employers that utilize independent contractors.
If any of the foregoing seems unclear as to how it applies to your specific circumstances, please keep in mind that we can help. Give us a call or drop an email. We’ll respond immediately.