- August 11, 2015
- Posted by: Seth Heyman
- Categories: Business Law, Employment Law
Countless businesses use independent contractors to avoid the tangled web of issues associated with the employer/employee relationship under US law. Unlike employees, independent contractors are not covered by minimum wage and overtime laws, and companies are not required to provide unemployment insurance and workers’ compensation coverage. Contractors also benefit from the relationship, as their wages are paid absent mandatory deductions for social security and taxes.
The independent contractor designation has long been the subject of scrutiny by the IRS, among others, and the misclassification of an employee as an independent contractor can result in numerous legal ramifications. The use of independent contractors recently has gotten even more complicated due to the US Department of Labor’s publication of Administrator’s Interpretation 2015-1. The Interpretation is part of the Department’s closer monitoring of the independent contractor designation.
In the past, businesses that did not control a person’s hours or the manner in which that person performed their tasks typically retained their services as an independent contractor. This “control factor” was the single most important factor in a court’s determination as to whether a person was properly classified as an independent contractor.
The new DOE Interpretation de-emphasizes the control factor, and emphasizes the multi-factor ‘economic realities’ test, which focuses on whether the worker is economically dependent on the employer. Some of the considerations in making this determination include (i) the extent to which the work performed is an integral part of the employer’s business; (ii) the worker’s opportunity for profit or loss depending on his or her managerial skill; (iii) the extent of the relative investments of the employer and the worker; (iv) whether the work performed requires special skills and initiative; (v) the permanency of the relationship; and (vi) the degree of control exercised or retained by the employer. If a person is economically dependent on an employer, then an independent contractor agreement with that person would not withstand judicial scrutiny.
Misclassifying a person as an independent contractor can generate significant, adverse financial consequences for the company, including the imposition of fines and penalties, not to mention back taxes and possible wage theft claims.
Businesses that currently employ, or are seeking to retain, independent contractors should take the time to speak to an experienced attorney as soon as possible, to ensure that the relationship is properly established.