The Fair Labor Standards Act (FLSA) contains various wage and hour protections including minimum wage and overtime provisions. However, entitlement to such protections depends upon one being an “employee” versus an “independent contractor.” The U.S. Department of Labor (DOL) recently reaffirmed the traditional multi-factor test for determining proper status.
What are the factors for determining an independent contractor?
When determining whether someone has been properly treated as an independent contractor, DOL and the courts will look to the “economic reality” of the relationship with the pertinent factors being:
- The nature and degree of control by the employer- Greater control suggests an employment relationship;
- The worker’s opportunity for profit or loss- Greater opportunity is associated with independent contractor status;
- The worker’s investment in equipment or materials required for his or her task- Greater the investment, the more likely independent contractor status will be found;
- Whether the service rendered requires an essential skill- The more skill involved, the better chance of supporting independent contractor status;
- The degree of permanence of the working relationship- Greater permanence suggests employment relationship;
- The degree to which the services rendered are an integral part of the employer’s business- The more integral, the more likely an employment relationship will be found.
No single factor is determinative, though the “nature and degree of control by the employer” tends to be the most important consideration.
Why are many business owners inclined to treat workers as independent contractors?
Unfortunately, many (though not all) business owners compensate workers as independent contractors in an improper attempt to avoid legal obligations such as federal and state employment tax liability, workers compensation premiums, overtime and minimum wage law compliance, and/or equal employment opportunity laws. Of course, this is often at the expense of the “independent contractor” who may find themselves with an unexpected self-employment tax bill at the end of the year or the inability to collect workers compensation benefits if they suffer a workplace injury. Also, independent contractors are not provided employer-based health coverage and retirement plans.
Should employers assume that by classifying workers as independent contractors that they can reduce or minimize accountability to government agencies?
Absolutely not. The IRS will often go after businesses it deems to have misclassified workers as independent contractors and assess unpaid employment taxes and associated penalties. Likewise, DOL has audited businesses for minimum wage and overtime violations with regard to workers improperly characterized as independent contractors. Moreover, businesses have been cited for violating state workers compensation statutes by underreporting employee numbers by virtue of misclassification.
Should employers assume that they are immune to employment claims by independent contractors?
The answer is a resounding “No”. As with government agencies, individual claimants have successfully challenged their employers’ erroneous attempts to treat them as independent contractors and have gone on to recover damages under various employment laws.
Takeaways for employers:
- Tread carefully when deciding whether to treat a worker as an independent contractor versus an employee;
- Have an employment attorney as well as a tax professional assess the propriety of independent contractor status for a given position;
- Merely labeling an individual an “independent contractor” is insufficient to legally confer independent contractor status;
- Government agencies and the courts primarily look at the level of control an employer maintains over an individual in assessing whether the person is legally an independent contractor; and
- Getting it wrong can bring serious adverse consequences such as violations of federal employment tax law and state workers compensation statutes.
Takeaways for an employee and independent contractor:
- Just because you acquiesce to independent contractor status does not in and of itself make it so;
- Be wary of employers who insist upon independent contractor status for jobs traditionally associated with employment status. Employers will do this because it is often to their advantage and to your disadvantage;
- Being treated as an independent contractor can have adverse consequences for you such as increased employment tax liability (self-employment tax), disentitlement to unemployment benefits and ineligibility for workers compensation in the event of an on the job injury;
- If you are being treated as an independent contractor but the status appears questionable, have a tax professional review your situation to see whether employment or independent contractor status is more beneficial to you from a tax standpoint; and
- Do not assume that because you have been treated as an independent contractor that you are ineligible for unemployment benefits, workers compensation, or protection under federal and state wage/hour laws. Many individuals have successfully pursued such claims where they were misclassified as independent contractors.