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The DOL's Latest Guidance on Independent Contractor Relationships

    September 14, 2015

    Employee or Independent Contractor? – A Summary of The DOL’s Latest Guidance and Steps You Can Take to Protect Your Company

    By CCHRA Legislative Chairperson Jennifer Ermilio, Esq. (September 2015)

    In case you missed it while you were lying on the beach or just facing another busy day at the office, on July 15, 2015, the United States Department of Labor (DOL) published guidance on the economic realities test. This test is used to determine whether a worker is an independent contractor or employee under the Fair Labor Standards Act (FLSA).

    According to the DOL, misclassification of employees as independent contractors is a growing problem that needs to be brought under control.  Under the DOL’s new guidance, the vast majority of workers will be considered employees. 

    Below is a summary of the DOL’s guidance and some steps employers can take to reduce the chance of an investigation or lawsuit.  

    The Economic Realities Test

    As explained in the DOL’s guidance, the focus of the economic realities test is on whether the worker is economically dependent on the employer or truly operating an independent business.  The economic realities test requires the following six factors be considered together to determine whether a worker is an employee or independent contractor.  No one factor is dispositive, especially the right to control the worker’s work. 

    1. Is the work an integral part of the employer’s business? A worker’s work will be integral to the employer’s business even if it is only a small part of the employer’s business. Work need not be performed on company premises to be integral.
    1. Does the worker’s managerial skill affect his opportunity for profit or loss?  This factor looks at whether the worker uses managerial skill and initiative to affect the opportunity for profit or loss, not whether the worker can work more or fewer hours at his discretion.  Some things to consider are whether the worker hires others to assist him, advertises and markets his services, chooses and purchases materials and equipment, negotiates contracts, rents space and sets time tables for his work.
    1. How does the worker’s relative investment compare to the employer’s investment?  This factor requires employers to consider not just the worker’s investment alone, but how it compares to the employer’s investment.   A worker’s relatively minor investment compared to the employer’s investment suggests economic dependence on the company which is indicative of employee status. 
    1. Does the work require special skill or initiative? This factor does not relate to the worker’s technical skills, but to the worker’s business skills, judgement and initiative.  When analyzing this factor, employers should consider things such as whether the worker engages in marketing his services, choosing his materials, and determining how and when to fill his orders.
    1. Is the relationship between the worker and the employer permanent or indefinite?  While a permanent or indefinite relationship will often favor employee status, employers need to look at the reasons why the relationship is permanent or indefinite.  For example, if it is the result of the worker’s independent business initiative, this will likely favor independent contractor status.  However, if it is merely related to the particular characteristics of the industry, such as the need for seasonal work, this factor will weigh in favor of employee status.
    1. What is the nature and degree of the employer’s control over the employee’s work?  The DOL explained that this factor should not be given undue weight.  This requires an analysis of the worker’s actual, not theoretical, control over meaningful aspects of his work.  The fact that a worker controls the hours he works or works from home should have little impact.

    Steps to Protect Your Business

    In light of the DOL’s new guidance and as the determination of independent contractor status under various laws becomes more complicated, employers may wish to consider the following steps to help comply with the law:

    Designate a point person or team to monitor independent contractor relationships.  It is often helpful to have a single individual or team of people oversee the initial designation of workers as well as conduct periodic reviews because workers’ statuses may change over time.  It is important that these individuals understand current laws regarding independent contractor and employee relationships and consult with in-house or outside counsel as needed. Employees in the Human Resources, Finance or Legal Departments are typically the best choices.

    Keep basic records regarding the independent contractor determination process.  The company should gather and retain key documents in support of all worker status determinations. For example, supporting documents may include business cards, tax records, work project plans and correspondence from the contractor.  This documentation may serve as important evidence in the event of an audit or investigation by the DOL or a lawsuit by a worker or class of workers. 

    Use independent contractor agreements, but remember an agreement is not enough to show independent contractor status.  A freely negotiated independent contractor agreement that lays out the terms of the parties’ engagement can be helpful to show that the worker is operating his own business. However, an independent contractor agreement alone is not enough to prove independent contractor status.  It is important to follow the terms of the agreement and to make sure that it does not contain provisions that suggest employee status.

    When entering into agreements with service providers, obtain appropriate indemnification to protect your company from wage and hour claims by the service provider’s workers.  Employers are increasingly vulnerable to wage and hour claims by service provider’s workers.  Having a clear and enforceable agreement up front that indemnifies the company from such claims will help protect it in the event these claims are later raised.

    Don’t give independent contractors employee rights and privileges.  Giving independent contractors the same rights and privileges as employees may change their status to that of an employee.  For example, employers should avoid giving contractors internal email addresses and inviting them to employee functions.

    Use the independent contractor designation sparingly.  The DOL has made clear in its latest guidance that most workers will be considered employees.  Therefore, careful consideration should be given to the above factors before giving a worker an independent contractor designation. Furthermore, as a practical matter, too many independent contractors relative to an employer’s workforce may alone raise a red flag. 

    While nothing can insulate employers completely from liability, if companies keep in mind the latest guidance from the DOL and take steps to properly classify their workers, they can greatly reduce the chances of lawsuits, penalties and fines related to worker misclassification and ensure a happier, more productive workforce.  To read the full text of the DOL’s guidance, see http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.pdf.

    Disclaimers:

    This article has been prepared for informational purposes only and does not constitute legal advice. The information presented is not to be construed as an offer to represent you, nor is it intended to create, nor does the receipt of such information constitute, an attorney-client relationship.  Each situation is unique and the generalities mentioned may not apply to your situation.  Therefore, you should not rely on the information contained in this article without first obtaining the advice of a competent employment attorney.  

    The opinions and views expressed in this article are the opinions of the author and do not necessarily reflect the opinions or views of CCHRA or its members.