Understand How the Definition of Independent Contractor Has Changed Again
Posted on June 27th, 2017
Whether someone who performs work for you qualifies as an employee or an independent contractor matters a great deal in terms of your financial and legal obligations to that individual. This includes such issues as whether your business must pay minimum wage and overtime pay, and provide mandated employee benefits. Under President Obama, the U.S. Department of Labor’s Wage and Hour Division (WHD) staked out what labor attorneys describe as an “expansive view” of what it means to be an employee.
In 2015, the WHD issued an “Administrator Interpretation” (AI No. 2015-1), dealing with the employee vs. independent contractor question. Recently, Secretary of Labor Alexander Acosta issued a brief statement declaring that AI 2015-1 has been withdrawn. However, he cautioned employers that they are still subject to the requirements of the Fair Labor Standards Act “as reflected in the Department’s long-standing regulations and case law.”
It appears that what has changed is the Labor Department is now going to focus its enforcement efforts on employers that flagrantly violate labor laws and no longer take a more expansive view of employee-independent contractor issues. However, since the announcement was two sentences long, details about exactly what has changed are lacking.
An administrative interpretation (AI) is essentially a regulatory shortcut that gives guidance to WHD inspectors on how to interpret certain employment arrangements. An AI can be issued without the agency having to go through a full-blown regulation modification process, which is much more time-consuming but also carries greater legal authority.
Under AI 2015-1, inspectors were instructed to focus primarily on whether an individual performing services for a company was “economically dependent” on that enterprise, to determine whether the worker qualified as an employee. It was described as an “economic realities” test. If the purported independent contractor derived the bulk of his or her compensation from one company, it could more easily push the worker into employee status, and thus eligibility for various benefits and legal protections.
Key Status Criteria
Prior to the release of AI 2015-1, the Department of Labor (DOL) focus was on the degree of control the employer had on the individual’s work pattern, such as when and where the individual worked, and the level of supervision. Now given the withdrawal of AI 2015-1, the DOL appears to be returning to its previous position of focusing on control — not economic dependency.
Here’s a primary list questions and answers that have traditionally been weighed to determine a worker’s status. No one factor determines status. It’s important to review and, once again, rely on this list before deciding whether someone performing work for you is an employee or independent contractor.
- Is the work performed an integral part of the employer’s business? If so, it’s less likely that the worker is in business for him or herself.
- Do the worker’s managerial skills affect his or her opportunity for profit and loss? Workers who have the power to affect their own profit or loss, using skills such as hiring and supervising other workers, are more likely independent contractors.
- Does the worker have an investment in the facilities and equipment used to perform the work? To be considered an independent contractor, a worker must make some investment in the work equipment used, compared to the employer’s investment (and must also bear some risk for a loss).
- Does the worker have skills and initiative needed to exercise independent judgment over the work performed? Being a skilled worker alone isn’t an indication of the correct status. To be considered an independent contractor, an individual must generally have skills to be able to perform the work using independent judgment. Also, if the worker offers his or her services to other companies or individuals there’s a good chance that independent contractor status exists.
- What level of permanency exists in the relationship between the worker and employer? Long-term status or indefiniteness in the worker’s relationship with the employer suggests he or she is an employee. However, a worker’s lack of a permanent relationship with the employer isn’t definitive on its own. A short-term relationship may be due to industry-specific factors.
- What is the nature and degree of control maintained by the employer? This includes an analysis of factors such as pay level, work hours, how and where the work is performed, whether the worker can hire helpers and if he or she is permitted to also work for others. An independent contractor generally works free from most control by an employer. However, the mere fact that an individual works from home or offsite isn’t indicative of independent contractor status because the employer may still exercise substantial control in the working relationship.
The DOL cautions employers not to assume individuals are independent contractors simply because they’ve signed agreements stating so. The true nature of the working relationship is determined by the factors detailed above, rather than by a label assigned by a written agreement. However, written agreements are one way that businesses may protect themselves by defining otherwise legitimate independent contractor relationships and having workers indicate they understand and agree to them.
Finally, a worker’s decision to incorporate a business or become licensed by a state or local government agency generally has little bearing on determining the existence of an employment relationship.
The DOL’s decision to withdraw AI 2015-1 isn’t a radical departure, but more of a “back to the future” move. It does, however, appear to give organizations a bit more breathing room in their ability to treat certain workers as independent contractors. If you would like assistance evaluating your workers according to the factors above, consult with your labor law and tax advisors.