US Dept. of Labor Cracking Down on Misclassification Cases

The U.S. Department of Labor (“DOL”) has issued a 15-page briefing addressing the difference between an independent contractor and an employee, signaling an increased focus on misclassification – situations in which someone who should be classified as an employee has been treated as an independent contractor instead.

Before discussing the DOL’s briefing, I will review the differences between an independent contractor and an employee.

An independent contractor is a person who provides a service and is paid an agreed fee for the service without the deduction of payroll taxes and without having the hiring party (often called an employer) pay any unemployment or other payroll taxes on behalf of the contractor. The contractor agrees to accept whatever fee is negotiated, even if that fee is less than the federal minimum wage.  The independent contractor will not be eligible to participate in employee benefits such as health insurance, vacation pay, retirement plans, etc.  The independent contractor will be responsible for paying self-employment taxes with no contribution by the employer.

An employee must be paid minimum wage and overtime (unless the employee’s position qualifies him/her for an exemption), and certain payroll taxes must be paid by the employer on the employee’s behalf.  Benefits such as health insurance, vacation pay and retirement plans are often made available to employees.

Proper classification of a worker is important because it determines which protections may be available to the worker and who will be responsible for paying various taxes to state and federal governments.

Historically, the DOL and some states have identified various factors to consider in determining whether a worker is an independent contractor or an employee.  Those factors have typically boiled down to one concept:  control.  If the employer exercises sufficient control over how and where the worker performs assigned tasks, and provides the tools necessary to complete the tasks, the worker looks like an employee.  If the employer simply gives an assignment, or asks the person to solve a specific problem or issue or complete a particular project, without specifying how or where the person must perform the tasks necessary to complete the work and without providing the necessary tools, then the person looks more like an independent contractor.  There are a lot of grey areas between these two examples that are the subject of a substantial body of litigation over the proper classification of workers.

The DOL’s newly-issued briefing seems to adopt a new benchmark, focusing on the “economic reality” of the worker’s situation.  In short, if the worker is determined to be economically dependent on the employer, then the worker is probably best classified as an employee.  If the worker is determined to be in business for him/herself and is not economically dependent on the employer, then the worker is probably best classified as an independent contractor.

Under the DOL’s new approach, the level of control exercised by the employer over the worker is simply one of several factors to consider in a fact-based analysis. The other factors can include the following:

  • ·         Whether the person’s work is an integral part of the employer’s business.  If so, that would suggest that the person should be classified as an employee.  For example, a customer service call center operator may work from home using his/her own equipment, but if the core business is customer service, then the operator is probably best classified as an employee.  On the other hand, if a call center is offered as a tangential part of a business and unrelated work is at the core of the business, then someone working from home as a call center operator might not need to be classified as an employee.  The specific facts will determine the answer to this question.
  • ·         Whether the worker’s management skills affect his/her ability to earn a profit or suffer a loss.  A person who is in business for him/herself will need to exercise management skills that will determine whether he/she earns a profit or loses money, in addition to using whatever skills are needed by the employer.  The worker’s economic fate is, in effect, in his/her own hands.  In contrast, someone whose economic fate is dependent on the company will be looking to the employer to assign him/her additional jobs or work hours.  Such a person should likely be classified as an employee.
  • ·         A comparison of the worker’s investment to the employer’s investment.  If the worker typically depends on the employer to provide all tools, equipment, office space, etc., then the worker looks more like an employee.  If, however, the worker pays for office space, tools, equipment, advertising, insurance, and similar types of expenses, relying on the employer only for certain types of investments, then the worker looks more like an independent contractor.
  • ·         Whether special skills are required.  This is not an analysis of whether the worker has an advanced or professional degree.  Rather, the question is whether the worker is using business skills, judgment and initiative or depending on the employer to use those skills to further the business.
  • ·         Whether the relationship is considered permanent or indefinite.  Independent contractors typically work on a project basis, moving on to a new employer once a project or series of projects or assignments is completed, and having the ability to choose whether to accept or reject new work offered by the employer.  Employees, in contrast, typically are considered permanent, in the sense that they may have only one employer and are expected to perform all assignments given to them rather than picking and choosing which assignments to accept.  Employees are also considered indefinite, in the sense that their work is on an at-will basis such that they can be terminated at any time by the employer.

Time will tell exactly how this new standard will be applied by the DOL, including whether an economic reality standard will really produce different conclusions than the traditional reliance on a control test.  And, even though we can expect the DOL to apply this newly-announced standard during its enforcement activities, the ultimate arbiter of whether a worker is an employee or independent contractor will be the courts.  Stay tuned for updates.

In light of this new approach by the DOL, employers are encouraged to reevaluate the classifications of their workers and make any needed corrections voluntarily as soon as possible.  Workers who suspect that they may not be properly classified may also wish to consult counsel.

The analysis set forth in this article is provided for general understanding only and should not be considered legal advice.  Counsel should be consulted regarding any specific legal issues.

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