U.S. Puts Short Leash on Independent Contractor Status

Independent contractor or employee? It’s a question that many business owners face as they grow from being self-reliant to needing help. Initially, many small business owners decide to categorize individuals as independent contractors.

For many, the need for a routine, part-time worker, not as full-time, is not there. For many others, the costs involved in hiring a worker — such as worker’s compensation insurance, payroll taxes, and compliance with labour laws — are a limiting factor.

However, as many companies have discovered the hard way, the line between independent contractor and employee is thin, and with the launch of the U.S. Department of Labor’s Wage of Hour’s Division’s Administrator’s Interpretation No. 2015-1 two weeks ago — PDF download here — it’s gotten even thinner. The ability to classify someone as an independent contractor will be extremely tough.

The ability to classify someone as an independent contractor will be extremely tough.

Who Determines Employee v. Contractor?

The legal decision of an employee versus an independent contractor rests with different entities. The I.R.S., the U.S. Department of Labor, and individual states have different tests to ascertain whether someone is an independent contractor or an employee. But until recently nearly all agree on the simple test to ascertain whether someone is an employee or a contractor: If the business has considerable control over the person, then the man is an employee rather than a contractor. Interpretation No. 2015-1 changes this and will probably have a ripple effect with other state and federal agencies.

In the current Interpretation, the Department of Labor said that the”misclassification of workers as independent contractors is found in a growing number of workplaces in america.” To help ensure that people are properly categorized, the D.O.L. has entered into arrangements with the I.R.S. and 26 states. As part of the initiative, the D.O.L. issued the Interpretation to assist companies and other things determine whether a person is an employee or contractor.

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Unfortunately for businesses that have sought the aid of independent contractors, this Interpretation has determined that”most employees are employees under the FLSA [Fair Labor Standards Act].”

Previous’Control and Management’ Test

Before this Interpretation, most entities utilized the”management and control” test to find out whether someone was an employee or independent contractor. Under the direction and control evaluation, the prevailing variable was whether an employer could tell employees when and how to perform their job.

Some of the factors that helped determine this were:

  • Did the individual receive training from the organization?
  • Did the person receive tools from the company?
  • Did the company tell the person when to perform the job, the way to do the job, or where to do the job?
  • Did the person work full time for the business for a substantial length of time?

Many companies could avoid having employees by restricting the amount of time a person performed services for your company, the kinds of services which were done, and the quantity of oversight the firm exercised over the individual. This enabled the company to bypass the costs of having a worker. Sometimes this was legitimate. In others, however, it was to hire someone at a substantially lower cost than an employee.

New’Economic Realities’ Evaluation

Together with the new Interpretation, the Department of Labor has moved away from just the direction and control evaluation and towards an”economic realities” test, where it appears at the fiscal independence of the individual in the company to ascertain whether a person is an employee or contractor. Rather than looking at just if there’s control and direction, the D.O.L. recommends using a 6-factor test.

  • Is the job done by the person integral to the company’s business? As an example, if the employer can’t provide services without the person’s contribution (i.e., a pizza business can’t deliver pizzas with no driver), then it seems like employment.
  • Can the person experience both gain and loss? As an example, if the individual may solicit additional business from the corporation’s customers on their own, then it appears less like employment because the individual may experience profit on their own.
  • To do the services, do both the person and the company have comparable financial investment? This is very similar to the old variable of getting training and tools from the organization. But it now goes farther than just if training and tools are received. The D.O.L. now looks at the fiscal amount spent by the two parties to do the services, on items such as tools, training, advertisement, and insurance. The nearer the fiscal contributions by both parties, the less it seems like employment; the farther apart, the more it will.
  • Does the job require particular skills and independent thought? With this, it’s not only whether abilities are required, but also if the individual can utilize those abilities independent of instructions from the employer. By way of instance, if a business tells an extremely skilled developer how to create a computer application, it resembles employment. But when the company simply asks the programmer to correct a problem in any way that the programmer can, it seems less like employment.
  • What’s the length of period of this relationship? The longer the association between the parties, the more it seems like employment. This is very similar to the old variable, but now requires a much greater look at if the person is financially determined by the business during the duration of time.
  • What is the character and level of the business’s control? The test still examines the direction and control variable, but more from a financial aspect. It looks at whether a person can actually turn down jobs and, even if she chooses a job, place her own pace for jobs that are procured.
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For ecommerce and other tech companies that have employed independent contractors — for reasons such as not having sufficient consistent work or insufficient budget to pay for a worker — this new ruling may restrict the use independent contractors.

When hiring programmers, short-term manual labour to manage large order periods (including the holiday season), and people who are”integral” to the business, companies owners may be not able to classify such people as independent contractors, even if it’s just for a year or a couple weeks.

With the position of the Department of Labor and lots of states that most people are now workers, classifying those individuals as independent contractors can result in fines, penalties, and payment of salary and benefits.