If given the option, many employers would choose to classify workers as “independent contractors” instead of employees. Under this arrangement, workers are contractually bound to perform services for the employer in exchange for an agreed-upon rate, but the workers are not eligible for worker’s compensation, unemployment, protections from discrimination laws, overtime pay or minimum wage. The employer need not pay the FICA taxes, and workers receive a Form 1099 at the end of the year.
Companies like Uber have recently come under scrutiny for promoting what has been called the “Gig Economy,” testing the limits to avoid hiring employees.
But the “gig” appears to be up in light of the interpretation published by the Department of Labor this month addressing the misapplication of employees as independent contractors. The DOL states, “In sum, most workers are employees under the FLSA’s broad definitions.” This means that most employers with workers who are classified as independent contractors are probably violating the law and, given the DOL’s initiatives in this area, they are about to be caught.
Its conclusion rests not on the issue of “control” over the worker, as has long been the analysis, but the “economic realities” that focus on whether the worker is economically dependent on the employer or in business for him- or herself. The Labor Department identifies several factors for employers to consider in evaluating whether an individual can be classified as an independent contractor.
These include:
Is the work an integral part of the employer’s business? The department uses the example that for a construction company, a carpenter is integral to the business, whereas a software developer creating a website isn’t. The carpenter must be classified as an employee; the software developer can be an independent contractor.
Does the worker’s managerial skill affect the worker’s opportunity for profit or loss? The focus here is whether the worker’s managerial skill can affect the worker’s profit or loss, as opposed to whether profit or loss is dependent largely on more hours from the employer or more work — in other words, whether the worker independently will advertise, invest in her own business and grow the business based on her managerial skills? If so, then the worker has a business outside of the work she does for the employer.
How does the worker’s relative investment compare to the employer’s investment? The Labor Department states, “The worker should make some investment (and therefore undertake at least some risk for a loss) in order for there to be an indication that he or she is an independent business. An independent contractor typically makes investments that support a business as a business beyond any particular job.” The DOL rejects that all investments qualify and uses the example that a worker who brings his own tools might not be enough of a relative investment to the machinery used at the company.
Does the work performed require special skill and initiative? The department says, “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 employer permanent or indefinite? The department says “Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee. After all, a worker who is truly in business for him- or herself will eschew a permanent or indefinite relationship with an employer and the dependence that comes with such permanence or indefiniteness.”
What is the nature and degree of the employer’s control? While the economic realities test is the main factor to consider over “control,” the department adds, “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.”