Perhaps no other issue being pursued by the DOL is as publicized these days as whether workers are properly classified as employees rather than independent contractors. The issue reached new heights when the DOL in July 2015 issued a new Guidance on the existing “economic realities” test for whether an individual should be an employee rather than contractor. To help guide the inquiry, the DOL established six primary factors, none of which alone are likely controlling but all of which should be considered in reaching a determination:
- Is the work an integral part of the employer’s business? [The less integral the better for independent contractor status.]
- Does the worker’s managerial skill affect the worker’s opportunity for profit or loss? [The more a worker manages his or her own business regarding profits and losses, the better for independent contractor status.]
- How does the worker’s relative investment compare to the employer’s investment? [The smaller the worker’s investment the better for independent contractor status.]
- Does the work performed require special skill & initiative? [The more special the skill & initiative, the better for independent contractor status.]
- Is the relationship between the worker and the employer permanent or indefinite? [The more indefinite (and generally short-term), the better for independent contractor status.]
- What is the nature and degree of the employer’s control? [The less control over the worker the better for independent contractor status.]
Notice that whether or not an individual has an independent contractor agreement isn’t even an itemized consideration. The reason is that while agreements like that can certainly help – and are generally recommended – the critical inquiry is how individuals are actually treated and conduct themselves in the workplace. In other words, the “economic realities” of the relationship, not what someone is called by agreement or otherwise.
Needless to say, the potential liabilities for employee misclassification can be tremendous, ranging from back payments for minimum wage obligations, overtime and benefits to FICA contributions and certain employer-employee tax requirements. All the more reason why every company should closely examine whether any worker engaged as an independent contractor satisfies the above six factors, taking appropriate corrective steps as needed.
Written By: Ken Carlson, Constangy, Brooks, Smith & Prophete, LLP