Rethink Your Definition of Independent Contractor

The Department of Labor (DOL) recently issued “Administrative Interpretation 2015-1”. This publication clarifies the tests to determine whether a person is an “independent contractor” or an “employee” (1099 or W-2). The distinction significantly impacts the number of workers who are covered by minimum wage, overtime, and other regulations.

The Administrative Interpretation states that “most workers are employees under the FLSA"; however, the definition of employee is very broad, and requires that the “economic realities” test be applied when defining the term “employ”. These include:

  • Is the work performed an integral part of your business? Work that is essential to the business, such as a telephone operator in a call center, or a carpenter in a construction company indicates employee status.
  • Does the worker have the ability to affect his or her own profit or loss? Unlike an employee, an independent contractor seeks new clients, is subject to loss or gain of business, and decides which jobs to perform and when to perform them.
  • Does the person’s investment compare to the employer’s investment? Even if a person provides their own tools, this investment may not compare with the investment by the company in that job.
  • Does the work require special skills or initiative? An independent contractor must demonstrate business-like initiative. They make judgments and decisions such as bidding for or seeking the next project.
  • Is the relationship between the worker and the employer permanent or indefinite? The key to this question lies in the worker’s independent business initiative and is not simply time based. For example, if a person works in a seasonal industry, the employee works for the whole season, a contractor may not.
  • What is the nature and degree of the employer’s control? An independent contractor must control meaningful aspects of the work so that it is possible to view the worker as a person conducting his or her own business.

Examine your Unique Situation

Since more and more employers are using independent contractors as a result of recent restructurings, this determination will have broad implications. The DOL has determined that many workers have been misclassified. Also, be aware that this determination applies even if the worker works offsite or from home.

If there are any "gray areas" in your business about how to classify a worker, give us a call for help.
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