Properly classifying someone as either an independent contractor or employee is one of the biggest problems employers have when adhering to FLSA requirements. Do you know when it is okay to classify someone as an independent contractor and when they should be classified as an employee instead?
DOL Focus: Independent Contractor or Employee
"One of the hottest topics today for both the Department of Labor and plaintiffs’ attorneys is the misclassification of independent contractors. This issue, according to the government, is costing the government billions of dollars. Given the recent revenue shortfalls at both the state and federal level, governments have a keen interest in ensuring that as many workers as possible are classified as employees because they want those revenues." Ted Boehm explained in a recent BLR webinar.
Efforts are underway by state and federal legislators to enact new laws with new penalties to crack down on employers who are misclassifying workers as contractors. In fact, in the wage and hour division of the DOL, they’re focusing on this misclassification and are planning new initiatives to address this issue, including partnerships with state agencies. Additionally, the IRS has promised 6,000 random audits over a 3-year period.
Boehm explained that the DOL estimates that up to 30 percent of businesses misclassify their workers:"The government is intent on finding businesses that try to pass off employees as independent contractors, and has put measures in place to catch these offenders and more measures will be put in place in the next 4 years."
With all of this focus on proper classification, how can an employer get it right? The DOL looks to the following factors:
- The degree to which the individual’s work is controlled by the business
- The individual’s investment in equipment and facilities
- The individual’s opportunities for profit or loss
- The amount of initiative, judgment, or foresight the individual uses in open-market competition
- The permanency or duration of the work relationship
- The extent to which the individual’s work is an integral part of the organization’s business or activities
No single factor is determinative. Really, the ultimate question is whether the individual is economically dependent on the business for his or her livelihood. Where it is a close call, err on the side of caution; the government will be more likely to find someone is an employee than not.
Take note: this test used by the DOL is known as the economic realities test. Other federal agencies (such as IRS and state unemployment and workers’ compensation agencies) have their own tests as well.
For more information on properly classifying workers as independent contractors or employees, order the webinar recording of "FLSA Compliance: Dispelling Myths and Mastering Pay Policy Challenges for Non-Exempt Employees." To register for a future webinar, visit http://catalog.blr.com/audio.
Attorney Ted Boehm is an associate in the Atlanta office of Fisher & Phillips LLP. Mr. Boehm’s practice focuses the defense of wage and hour claims arising under the Fair Labor Standards Act and claims arising under Title VII.