Your Independent Contractor May Actually Be Your Employee

Your Independent Contractor May Actually Be Your Employee

Many small businesses employ independent contractors for a variety of purposes. However, according to a “new” interpretation issued by the U.S. Department of Labor Wage & Hour Divisions, your independent contractor may actually be a short-term employee . The consequences of improperly classifying an employee as an independent contractor can be expensive, so understanding the rules if vital. For years there have been lawsuits alleging misclassification of workers against cable companies such as Comcast, transportation and logistics companies (FedEx), software giants (Microsoft), and hundreds of small companies. The growth of on-demand services which extensively use or used “independent contractors”  have seen their own lawsuits. Companies like Homejoy have shut-down and “gig economy” giants Uber face potential class action lawsuits which could ultimately cost the company tens or hundreds of millions of dollars.

The “new interpretation” issued by the Wage & Hour Division, (here for an html version or here for a pdf version) is not really new so much as a repackaging of existing law. The Department of Labor extended its effort to combat the growing “gig economy” to classify far more workers as employees subject to wage and hour laws. The impetus for the new interpretation can be seen here in the first paragraph of the interpretation.

Misclassification of employees as independent contractors is found in an increasing number of workplaces in the United States, in part reflecting larger restructuring of business organizations. When employers improperly classify employees as independent contractors, the employees may not receive important workplace protections such as the minimum wage, overtime compensation, unemployment insurance, and workers’ compensation. Misclassification also results in lower tax revenues for government and an uneven playing field for employers who properly classify their workers.

Leaving the policy and business model arguments aside, the new interpretation does offer a few clues about when a worker might properly be considered an independent contractor. Employers should be cognizant that no single factor discussed by the DOL is a bright line that decides when a worker is an employee or independent contractor.

I must dispell two myths about classification of workers. First, just because the worker is highly skilled, a licensed professional, or a technical worker does not mean they are an independent contractor. Such individuals are just as likely to be found a to be an employee as unskilled labor. The key factors the DOL examine focus on the relationship between employer and worker, considering only lightly, if at all, the skill, knowledge, education, or experience of the worker. So a highly skilled person may be an employee even if others in their field are often considered independent contractors. Second, labels and even contracts do not matter.  Just because a contract exists between an employer and a worker that calls the worker an independent contractor does not make it true. A rose is still a rose, even if the rose calls itself a daisy.

Within the DOL’s interpretation, much can be gleaned from the examples which can help employers can help determine if a worker can be properly classified as an independent contractor.

How dissimilar is the independent contractor’s field of work from that of the employer? The closer the two fields are the more likely a person is going to be considered an employee. If you are a web designer and you hire a programmer, you may have an employee. If you are a web designer and you hire an electrician to wire your new office space, the electrician is most likely an independent contractor.

What is comparison between the equipment/tools that a worker provides as compared to the employer? The DOL calls this investment. If a worker invests significant funds into tools/materials necessary to do the work and that investment is similar to others in the same industry, then it is likely the person is a contractor. The greater the disparity of financial investment (read capital) outlay, the more likely a person is going to be an employee because the worker is relying upon the employer to provide the necessary tools and supplies to complete the job.

Does the worker advertise his/her services to multiple potential clients? A worker who is actively pursuing multiple clients (as opposed to paying lip service to the effort), routinely seeks other business opportunities is more likely to be an independent contractor. There is no magic number and this factor is difficult to assess when dealing with individuals who are just starting their business. More seasoned and experienced independent contractors are much easier to assess.

Does the worker have multiple clients? This is an easy one to assess. Even when the worker and the employer are in similar industries, an independent contractor with multiple clients is likely to be found an independent contractor.

Note that none of the factors in isolation in the DOL interpretation or the matters discussed above are going to easily point to an independent contractor. For example, it is not unusual for people to have more than one job, so it is not unreasonable for an independent contractor with say three main clients to be classified as an employee of three “clients” if other factors are not present.

The 2 Sentence Take-Away

Employers should understand the DOL’s bias; the DOL wants to find an employee relationship, and employers should then take steps to classify workers appropriately. Proper classification requires a balancing of many different factors and there is no formula that indicates clearly whether a person is an employee or an independent contractor.

If you are not sure or need some help to properly classify workers, please contact us to conduct an assessment.