New guidance released July 15, 2015, from the Department of Labor (DOL) narrows independent contractor classification so that “most workers are employees under the FLSA.” The DOL’s guidance makes it clear that the amount of control an employer has over a worker is not as important in properly classifying the worker. Instead, the DOL details an “economic realities” test that must be used “to determine whether the worker is economically dependent on the employer (and thus the employee) or is really in business for him or herself (and thus its independent contractor.)”
According to DOL, you need to consider the following factors when determining if a worker is truly an independent business or is economically dependent upon the employer:
- Is the work an integral part of the employer’s business? DOL says that an independent contractor’s work is unlikely to be an integral part of the employer’s business.
- Does the worker’s managerial skill affect the worker’s opportunity for profit or loss? An independent contractor is one whose managerial decisions (whether to hire others, purchase more equipment, advertise, etc) are more likely to lead to profit or loss beyond the current job.
- How does the worker’s relative investment compare to the employer’s investment? The worker’s investment must be significant in magnitude relative to the employer’s investment in the overall business to indicate an independent contractor. DOL emphasized a Tenth Circuit opinion that determined a rig welder’s investment in equipment of $35,000-$40,000 did not indicate the welders were independent contractors when compared to the employer’s investment in the business.
- Does the work performed require special skill and initiative? This factor considers special business skills and judgment in moving the business forward, rather than technical skills in performing the work.
- Is the relationship between the worker and the employer permanent or indefinite? The more permanent the job, the more likely the worker is truly an employee.
- What is the nature and degree of the employer’s control? Again, the DOL guidance de-emphasizes the importance of this factor, explaining that this should not be given undue weight. However, the amount of control an employer has over a worker helps determine if the worker is truly in business for himself or not.
It is clear from the guidance that DOL views most workers as employees; therefore, the classification of independent contractors should be used sparingly. You should review all of your independent contractors in light of this guidance to make sure they are properly classified because a finding of misclassification can result in significant liability for unpaid overtime, unemployment and worker’s compensation insurance premiums, as well as other potential statutory penalties and liabilities.
You can read the full guidance, with examples of each factor, here: https://www.govinfo.gov/content/pkg/FR-2022-10-13/pdf/2022-21454.pdf