Many businesses have chosen to classify some on their payrolls as “independent contractors” instead of traditional employees.
The distinction is important because the classifications hold advantages and disadvantages for both the employer and the employee. It is also important because the classifications are regulated under federal law.
Employers who classify workers as employees must comply with the Fair Labor Standards Act (FLSA) (record keeping, minimum wage and overtime), tax withholding, payroll taxes for Social Security/Medicare, unemployment compensation and workers’ compensation.
Employees must also be included in group health insurance plans, ERISA-covered retirement plans, eligibility for Family and Medical Leave Act (FMLA), leave and other benefits, calculation of leave entitlement, eligibility for meal and rest breaks, reimbursement for business expenses, immigration compliance, plus statutes such as the Americans with Disabilities Act (ADA), other anti-discrimination laws, and a host of state and local laws that traditionally do not cover independent contractors.
In determining whether a worker is properly classified as an independent contractor under the FLSA, courts have historically relied on the six-factor “economic realities test,” which considered:
The extent to which the work performed is an integral part of the employer’s business
The worker’s opportunity for profit or loss
The nature and extent of the worker’s investment in their business
Whether the work performed requires special skills and initiative
The permanency of the relationship
The degree of control exercised or retained by the employer
While no single factor was meant to be a primary determination, courts typically placed primary emphasis on the degree of control exercised by the employer.
In 2015, the Obama Administration “reinterpreted” who can be classified as an independent contractor.
The reinterpretation stressed that the factor which courts have traditionally used as a key test should not be given undue weight. It unambiguously stated that the agreements or titles used by employers and independent contractors are wholly “irrelevant” to the determination and that “most workers are employees.”
Under the policy, the Obama Department of Labor (DOL) relied on its view of a worker’s “economic independence” in determining whether they were an employee rather than an independent contractor. It looked primarily at whether the worker was truly in business for him or herself or was economically dependent on the employer for which he or she provided services.
In June of 2017, the Trump DOL rescinded the Obama policy and the determination of whether a worker is an employee or an independent contractor reverted to its traditional methodology.
When it rejected the Obama policy, DOL stressed that the action “does not change the legal responsibilities of employers under the Fair Labor Standards Act . . . , as reflected in the department’s long-standing regulations and case law.”
Recently-enacted tax reform included provisions which may result in an increased number of workers requesting be to classified as independent contractors rather than employees.
Employers must take great care in classifying their workers as independent contractors. Misclassification has significant implications and can lead to severe penalties.
WebBlast July 18
SAF members can participate in an upcoming WebBlast on July 18 which will discuss the classification of workers. The WebBlast will be conducted by labor attorney Jessica Summers, Strategic Policy Director of the Small Business Legislative Council who will examine the risks and rules involved in classifying workers as independent contractors.