Understanding Independent Contractor Classifications

Understanding Independent Contractor Classifications

by Steven Smith

With the introduction of the Affordable Care Act and other changes in the past 2 years, it became critical for the Department of Labor to look at the definition of an Independent Contractor more closely, especially with the increase of complaints from workers alleging misclassification of their current employment status. The Department of Labor has always said

Independent contractors, by definition, are self-employed and because they are not employees, independent contractors are not covered by employment, labor, and related tax laws. Employers may be tempted to reclassify employees as independent contractors in order to avoid taxes, benefits, and other liability. Whether or not a worker is covered by a particular employment, labor, or tax law hinges on the definition of an employee.”

On July 15th, 2015, the Wage and Hour Division of the U.S Department of Labor released an “Administrator’s Interpretation” to address the “misclassification of employees as independent contractors . . . in an increasing number of workplaces in the United States.” The reason this has been such an issue is that misclassifying a worker not only makes it hard for those employers who obey the law and play fair, but it also results in lower tax revenues to the government, so naturally the IRS has become a close ally as part of the Strategic Enforcement plan as outlined on the Department of Labor’s Blog, an article released the same day.

As a part of this process of enforcement, employers are encouraged to conduct what is now known as an economic realities test, which consists of 6 factors:

    1. The extent to which the work performed is an integral part of the employer’s business.
    2. The worker’s opportunity for profit or loss depending on his or managerial skill.
    3. The extent of the relative investments of the employer and the worker.
    4. Whether the work performed requires special skills and initiative.
    5. The permanency of the relationship.
    6. The degree of control exercised or retained by the employer.

The interpretation link above is very helpful as it takes these 6 factors and outlines each one of them with examples and ways to test and determine whether or not you are able to classify someone as an independent contractor. The DOL admonishes:

In undertaking this analysis, each factor is examined and analyzed in relation to one another, and no single factor is determinative. The factors should not be applied as a checklist, but rather the outcome must be determined by a qualitative rather than a quantitative analysis.”

ADDITIONAL THINGS TO CONSIDER

As is common knowledge for most Human Resource professionals when going through this analysis, employers should maintain records about how they determine whether a position is an independent contractor or not, as well as any facts used in making those decisions. Some examples of this include factors such as the contractor’s business license, business cards, the contractor’s tax records, records of the business they have undertaken, project work plans and any correspondence with the contractor.

This also means that employers should consider the rights or privileges they may have given contractors in the past. The DOL guidance is set to remind employers that it is critical to do an internal audit on existing contractors to make sure that they are truly an independent contractor, and in some cases, validate the contractor agreement or revise it to fit within the new standards. Contractors should not have access to certain things. Some examples of this could include a company email address, server access, etc. Independent contractors should not be invited to employee related functions, such as work parties, etc.

Finally,

  • The DOL believes most work, should be performed by employees. What this really means is that the use of contractors in your business should be used sparingly.
  • A careful review of the type and scope of work being performed should be completed before engaging the services of anyone who is not an employee. This will help with the documentation part of the process.
  • When entering into agreements with other service providers, the employer should obtain appropriate indemnification provisions to protect the company from the wage and hour claims of the service provider’s workers.
  • Entering into an independent contractor agreement or even hiring a business entity (rather than a person) does not necessarily protect the employer from liability under the Fair Labor Standards Act.

As a reminder, the Department of Labor has said, “Although independent contracting relationships can be advantageous for workers and businesses, some employees may be intentionally misclassified as a means to cut costs and avoid compliance with labor laws.” Be sure to conduct your own internal audit and use this process to keep your own company from violating the law.

If you have any further questions about the items mentioned in this article, or if you would like more information please, contact us.


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