Are your “Independent Contractors” really Employees?

By:  Lonnie C. Rich

In July, 2015, the Department of Labor (DOL) issued a new interpretation with a six-factor “economic analysis” for determining whether someone is an employee or an independent contractor. “Control” is no longer the dominant factor. 

At its most basic level, the issue may now be reduced to the following question: 

Is the worker economically dependent on the employer and “suffered or permitted” to work, or is the worker in business for himself or herself and truly not dependent upon the employer for work?

The six factors used in answering that question are set out below.  Each factor needs to be considered when classifying a worker.

1.       Is the work an integral part of the employer’s business?  For a construction company, carpenters are integral.  For that same construction company, a software developer that develops software to track bids, materials, schedules and orders is not integral and may operate more like an independent contractor.

2.       Does the worker’s managerial skills affect the worker’s opportunity for profit or loss?  If the worker has the opportunity for making more or less depending on their management actions – job selection, hiring employees, advertising, buying more efficient equipment or computer programs, they are more like an independent contractor.  If the worker can simply do their job well or can work more or less hours, that is not managerial skill, but making choices just like an employee.

3.       How does the worker’s relative investment compare to the employer’s investment?  A rig welder’s investment in equipped trucks costing about $40,000, is minimal compared to the millions invested by the employer.  The greater the disparity in investment, the more likely one is to be an employee.

4.       Does the work performed require special skill and initiative?  The skill of a worker does not necessarily indicate independence from the employer.  Even if there are special skills, those skills may not be used in an independent way.  If special skills lead to economic independence from the employer, then the worker is more like an independent contractor.

5.       Is the relationship between worker and employer permanent or indefinite?  If either, that suggests employee, not an independent contractor. 

6.       What is the nature and degree of employer’s control?  Is the worker’s control such that he or she seems to be conducting their own business?  Lack of immediate and direct control (“looking over another’s shoulder”) or control over hours is not indicative of independent contractor status.  With technological advances and enhanced monitoring, there are new ways for employers to exercise control.

DOL has concluded that most workers are employees, not independent contractors.

While this is not binding, the DOL opinion will be given deference by the courts.

Employers need to be concerned about whether they have classified their workers correctly.  Failure to do so can have significant implications for employment taxes, minimum and overtime wages, unemployment and workers compensation insurance as well as entitlement benefits. Getting it wrong can result in significant liability.

RRBMDK has attorneys available to assist you in interpreting, creating and maintaining proper worker classification.