Independent Contractor or Employee? (Benefit Minute)

Posted in: Benefit Minute, Employee Benefits

The Department of Labor (DOL) recently issued additional guidance regarding who is an employee under the Fair Labor Standards Act (FLSA).  Administrator’s Interpretation 2015-1 released by the Wage and Hour Division is a continuation of the DOL’s effort to assist employers in understanding who is an employee under the FLSA and to curtail misclassification of workers as independent contractors. It expands on the information previously provided in Fact Sheet #13 prepared by the Wage and Hour Division.

Economic Realities Test

Under the FSLA, the term “employ” means to “suffer or permit to work.” An employer “suffers or permits” an individual to work if the worker is economically dependent on the employer.  To determine whether the worker is economically dependent on an employer (and therefore is an employee rather than an independent contractor), courts use an economic realities test.  The DOL guidance addresses the factors that should be applied in the economic realities test.  All factors must be considered in each case; none is determinative. The Administrative Interpretation states that most workers are employees under the FLSA’s broad standard and the economic realities test.

Six Factors

The six factors of the economic realities test are:

  • Is the work an integral part of the employer’s business? If the worker performs the primary work of the employer’s business (even if just one component of the business), then it is more likely that the worker is economically dependent on the employer and is therefore an employee.  An independent contractor’s work is less likely to be integral to the employer’s business.
  • Do the worker’s managerial skills affect the worker’s opportunity for profit or loss? If a worker is an independent contractor, he faces the possibility of making a profit or suffering a loss, and his managerial skills can affect the extent of either.  The managerial skills of an independent contractor will often impact opportunities for business from other parties.  On the other hand, a worker’s ability to earn more money by working more hours or if more work is available has little to do with managerial skills and is likely no different for an employee or an independent contractor.
  • How does the worker’s relative investment compare to the employer’s investment? – Both the nature and extent of the investment should be considered. A worker should make an investment that is significant in both nature and magnitude (as compared to employer’s investment) as an indication of an  independent  business.   The  investment  might  be  to  further the capacity to grow, reduce costs or expand the reach of the contractor’s market.  If the worker’s investment is relatively minor, it is more likely he is an employee.
  • Does the work performed require special skills or initiatives? A worker’s business skills, judgment, and initiative will determine whether a worker is economically independent.  Specialized technical skills do not indicate that workers are in business for themselves because the skills are used to perform the work and are not indicative of any independence or business initiative.
  • Is the relationship between the worker and the employer permanent or temporary? Permanency suggests that a worker is an employee. Conversely, independent contractors typically work on a project basis and do not work continuously or repeatedly for an employer.
  • What is the nature and degree of the employer’s control? A worker must control meaningful aspects of the work performed and must actually exercise that control in order to be an independent contractor.  Control exercised over a worker by an employer (even if due to the nature of the business, regulatory requirements, or other factors) indicates that the worker is an employee.

The guidance states that all six factors should be considered and the control factor should not be overemphasized.  It also states that the factors should be used as a guide to answer the ultimate question of whether the worker is really in business for himself (an independent contractor) or economically dependent on the employer (an employee).  There is no “bright line” test.

Misclassification Initiative

This is the latest step in the DOL’s Misclassification Initiative.  The DOL has stated that misclassification of employees as independent contractors has many adverse implications for workers because they are often denied access to benefits and protections to which they are entitled, such as the minimum wage, overtime compensation, family and medical leave, unemployment insurance, and safe workplaces. Employee misclassification generates substantial losses to the federal government and state governments in the form of lower tax revenues, as well as to state unemployment insurance and workers’ compensation funds. The DOL continues to work with the IRS and the states to share information and coordinate resources to address the worker misclassification issue.

Employers should carefully review the type and scope of work performed by nonemployees and document the independent contractor determination process in the context of this guidance.

 

 

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