INDEPENDENT CONTRACTOR VS. EMPLOYEE CLASSIFICATION
By Randall J. Andersen
January, 2016
By Randall J. Andersen
January, 2016
Disclaimer: The information contained on this page is not legal advice. The information provided on this website is for general informational purposes and is not necessarily updated to account for changes in the law. You should consult with an attorney for legal advice regarding your individual circumstances.
In July of 2015, the Department of Labor (DOL) issued an "Administrative Interpretation" that addressed the classification of independent contractors as "employees" under the Fair Labor Standards Act (FLSA).
The DOL contends that the independent contractor classification is overused, and that many persons previously classified as independent contractors should be classified as employees.
In the past, the degree to which a business controls how the work is performed was an important factor in determining whether an individual is an independent contractor or an employee (the "control test"). The DOL’s new approach de-emphasizes the control test, and now focuses attention on the "economic realities" test, which considers whether the worker is "economically dependent" on the employer, as opposed to being in business for himself. The idea is that if the worker is "economically dependent" on the employer, then he/she should be classified as an employee, even if the employer does not control the manner in which the individual performs the work.
The DOL indicated that it will consider six factors under its new economic realities test:
1. The extent to which work performed is an integral part of the employer’s business;
2. Whether the worker’s managerial skill affects his opportunity for profit or loss;
3. The relative instruments of the employer and the worker in facilities and equipment;
4. Whether the work requires special skill and initiative;
5. The permanency of the relationship between the worker and the employer; and
6. The nature and degree of control exercised by the employer over the worker.
The "economic realities" test is a significant shift in the way the Department of Labor views this issue. Unfortunately, it does not provide objective, concrete criteria upon which businesses can rely to make the determination. Some persons employed in the construction industry who previously could have been classified as independent contractors may now be classified as employees under the DOL analysis.
Although the DOL’s Administrative Interpretation does not have the force of law, it does indicate how the DOL will act in enforcement actions to limit the use of the independent contractor classification in the future.
The DOL contends that the independent contractor classification is overused, and that many persons previously classified as independent contractors should be classified as employees.
In the past, the degree to which a business controls how the work is performed was an important factor in determining whether an individual is an independent contractor or an employee (the "control test"). The DOL’s new approach de-emphasizes the control test, and now focuses attention on the "economic realities" test, which considers whether the worker is "economically dependent" on the employer, as opposed to being in business for himself. The idea is that if the worker is "economically dependent" on the employer, then he/she should be classified as an employee, even if the employer does not control the manner in which the individual performs the work.
The DOL indicated that it will consider six factors under its new economic realities test:
1. The extent to which work performed is an integral part of the employer’s business;
2. Whether the worker’s managerial skill affects his opportunity for profit or loss;
3. The relative instruments of the employer and the worker in facilities and equipment;
4. Whether the work requires special skill and initiative;
5. The permanency of the relationship between the worker and the employer; and
6. The nature and degree of control exercised by the employer over the worker.
The "economic realities" test is a significant shift in the way the Department of Labor views this issue. Unfortunately, it does not provide objective, concrete criteria upon which businesses can rely to make the determination. Some persons employed in the construction industry who previously could have been classified as independent contractors may now be classified as employees under the DOL analysis.
Although the DOL’s Administrative Interpretation does not have the force of law, it does indicate how the DOL will act in enforcement actions to limit the use of the independent contractor classification in the future.