Business owners are often compelled to meet staffing needs with independent contractors in lieu of employees in order to save money on taxes, benefits and sometimes pay (minimum wage and overtime). In doing so, they risk increasing federal (DOL, IRS, EEOC), state (Wage & Hour, Unemployment, HR) and even local/county scrutiny, as well as potentially serious legal and monetary ramifications. But for years, there has been a lack of clarity as to who qualifies as independent contractor versus an employee.
Currently, six non-exclusive, equally-weighted factors guide the analysis to help business owners determine whether a worker should be classified as an employee or as a contractor. These factors include: (1) the individual’s versus the employer’s degree of control over the work, (2) the individual’s (risk) opportunity for profit or loss, (3) the individual’s investment in facilities and equipment, (4) the permanency of the relationship between the parties, (5) the skill or expertise required by the individual, and (6) whether the work is “part of an integrated unit of production.” To date, these have fueled as much debate as they have resolved disputes, with different courts reaching different conclusions on how to classify the same workers, performing the same jobs.
To simplify this for business owners, the Department of Labor published a new proposed rule, intended to offer additional guidance by prioritizing its key determining factors. This proposed rule:
- Still uses the “economic realities” in relationships between workers and employers when determining proper classifications. As a matter of economic reality, if workers depend upon someone else’s business for the opportunity to render service, then they are most likely employees, while if they are in business for themselves, they are most likely contractors.
- Now seeks to elevate the importance of two “core factors” — the nature and degree of the worker’s control over the work and the worker’s opportunity for profit or loss based on initiative and/or investment — as the most probative of a worker’s status as either a contractor or employee. This collapses the second and third factors previously into a single, key factor.
- Maintains the remaining three factors (the amount of skill required for the work; the degree of permanence of the working relationship; and whether the work is part of a business’s integrated unit of production), but they would be downgraded to “guides” rather than core factors.
As a reminder, even if this new rule would go into effect later this year, it would not affect various state laws (including the “ABC” tests) governing worker classifications (for example, California makes notable distinctions). Also, any new DOL Rule would not impact current worker classification analysis conducted by other federal agencies pursuant to the Internal Revenue Code, the National Labor Relations Act, or other federal laws.
Meredith S. Campbell Chair, Employment and Labor Group
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