So the United States Department of Labor thinks most workers should be classified as employees and not independent contractors. That’s not really anything new. The DOL last month issued yet another guidance on this very issue. We got our first overview of the DOL’s guidance last week, which you can find here. The crux of the DOL’s guidance is its six-factor “economic realities” test to help employers figure out how it would classify their workers. We listed those factors last week. Let’s get an up-close (but maybe not personal) view of those factors after the jump…
OK, let’s dive right in:
Factor #1: Is the work an integral part of the employer’s business? The more the work appears integral to the business in question the more likely the worker performing it is economically dependent on the employer, and the more likely the worker is an employee and not an independent contractor. What exactly does it mean for work to be integral to the business? The work must truly be part and parcel of the services or product offered. For example, let’s say you run a company that provides, services and repairs air conditioning. The workers that actually do the installation, servicing and repairs are clearly doing work that is integral to your business, suggesting an employer-employee relationship. If your company now hires someone to come and provide extermination services in your offices, that work, while perhaps a needed service, is not integral to your business of providing, servicing and repairing air conditioning. This relationship appears to be one of independent contractor and client.
Factor #2: Does the worker’s (exercise of ) managerial skill affect his/her opportunity for profit or loss? If you own your own business, you have a chance to realize a profit or experience a loss beyond a current job. If you exercise managerial skill but you work for someone else, you probably will not participate directly in that business’ resulting profit or loss. Let’s return to the worker at your air conditioning company. S/he might repair and service the air conditioners you provide your customers and carry out assignments determined by you. S/he does not independently schedule appointments or do any marketing or advertising or worry about your office expenses. S/he might even agree on a regular basis to work more hours to earn more money. This person is likely an employee. S/he is not exercising managerial skill that is affecting his or her profit or loss. Someone doing the same work but also doing their own advertising and marketing, deciding which jobs to perform and how to perform them is exercising managerial skill. That exercise of skill affects profit or loss. If s/he directly experiences the resulting profits and losses, s/he is most likely an independent contractor.
Factor #3: How does the worker’s relative investment compare to the employer’s investment? Does the worker’s investment, if any, further the employer’s business? If so, how does it compare to the employer’s investment? If you provide your worker a company vehicle, company phone, insurance and equipment, you have made a significant investment. If your worker, aside from showing up to work and doing the work comes with his or her own preferred equipment, s/he has made an investment, but his/her investment compared to yours is minimal, and is indicative of an employer-employee relationship. If, however, your worker does his/her own advertising and marketing, uses his/her own vehicle (that may not be suitable for personal use) regularly purchases equipment used for performing certain jobs for certain clients, this is a more significant investment. It is probably similar to your level of investment. This scenario leans toward an independent contractor relationship.
Factor #4: Does the Work Performed Require Special Skill and Initiative? The skill here refers to the business and managerial skills referred to in Factor #2. Your air conditioning repair person may be performing highly skilled labor, but if s/he is not determining sequence of work, does not bid on subsequent jobs or perform similar activities (that affect the business’ profit or loss) s/he is probably a highly skilled employee and not an independent contractor.
Factor #5: Is the relationship between the worker and the employer permanent and indefinite? An independent contractor often works one project for the employer/business person. S/he may but does not necessarily work continuously for that business. Lack of such permanence or indefiniteness would indicate an independent contractor relationship. You and your air conditioning repair person, who works only for you and does only the work you assign him/her have a relationship qualifying as permanent and indefinite. If your air conditioning repair person bids for many different jobs with different clients, markets his/her services to many, negotiates rates with prospective customers, your relationship is not so permanent and indefinite. This worker may be an independent contractor.
Factor #6: What is the nature and degree of the employer’s control? Generally the more control you exercise over the worker — and meaningful aspects of the work– the more likely s/he is your employee. Lack of control over workers by itself, may not mean much if the workers work from home or otherwise work off-site. For example, let’s say you own a staffing company. Your company calls its temporary workers and assigns them to clients; it pre-screens those employees that it assigns; it determines wages and scheduling. These workers are, in all likelihood employees. Suppose, however, your company is more like a registry that workers sign up with and you provide those workers with a list of potential clients. The workers can decide which clients to call, negotiate rates and scheduling. Depending on whether other factors are met, this may be an independent contractor relationship.
Bottom Line: The more you and the worker appear to be intertwined, the more likely you are in an employer-employee relationship with that worker–even if you refer to him/her as an independent contractor. If you classify such a worker as an independent contractor, you are risking serious penalties, not to mention potential overtime pay. While, as I mentioned last week, the DOL’s guidance isn’t really new in substance, it’s instructive in how it looks at your relationship with your workers — and how you should view it if you want to stay under the DOL’s radar.
Well, I think that about covers this topic for now. Let’s meet back here next week to look at a new topic. See you then!
Disclaimer: This post’s contents are for informational purposes only, are not legal advice and do not create an attorney-client relationship. Always consult with competent employment counsel on any issues discussed here.
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