The classification of independent contractors vs. employees has been a hot topic for years and most recently has been fueled by the on-demand economy represented by such services as Uber and Homejoy. In today’s workplace, there are many situations where the distinction between employee and contractor is blurred and it’s difficult for employers to draw the line.
However, the Department of Labor (DOL) clearly believes an increasing number of workplaces are misclassifying employees as independent contractors and has issued new guidance, a fifteen-page memorandum that explains how to determine whether a worker is an employee or an independent contractor, including examples of real-life workplace situations. It is not a change in policy, but stresses that “most workers are employees under the [Fair Labor Standards Act]’s broad definitions” and thus entitled to the legal benefits associated with employee status.
Many employers rely too heavily on the “control test” when determining whether or not a worker is truly an “employee”. The current guidance significantly downplays the “control test” and focuses instead on the “economic realities test, “which looks at whether the worker is economically dependent on the employer or in business for him or herself.
Some recent high-profile cases include FedEx Corp, Uber, and Homejoy. The 7th U.S. Circuit Court of Appeals in Chicago recently ruled that FedEx Corp. drivers in Kansas are employees, not independent contractors and FedEx also settled in California for $228 million. Uber is appealing a recent San Francisco decision and Homejoy, a home-cleaning service, opted to close after they were hit with a lawsuit for misclassifying workers.
It’s not just major companies that are affected. Recently, the 3rd U.S. Circuit Court of Appeals in Philadelphia in Mikael M. Safarian v. American DG Energy Inc. et al. said a lower court should have considered “economic realities” in determining whether an engineer who worked for an energy company was an independent contractor rather than an employee. The majority noted, it is the economics of the relationship…not the structure of the relationship, that is determinative.
The DOL reminds employers that in conducting an economic realities test, an employer should look at six factors:
- The extent to which the work performed is an integral part of the employer’s business
- The worker’s opportunity for profit or loss depending on his or her managerial skill
- The extent of the relative investments of the employer and the worker
- Whether the work performed requires special skills and initiative
- The permanency of the relationship
- The degree of control exercised or retained by the employer
No single factor is determinative and the “outcome must be determined by a qualitative rather than a quantitative analysis.” In a Society for Human Resource Management article (SHRM), DOL Narrows Independent Contractor Classification, Matthew Disbrow, an attorney with Honigman in Detroit was quoted: “The subjective nature of the DOL’s interpretation, and its narrow focus on ‘economic dependence,’ creates substantial challenges for companies who wish to maintain their independent-contractor relationships.”
Some of his suggestions include:
- Use independent contractors sparingly
- Entering into independent contractor agreements or hiring a business entity (rather than a person) does not necessarily protect you from liability under the Fair Labor Standards Act
- Review the type and scope of work carefully before engaging the services of any nonemployee
- When entering into agreements with other service providers, obtain appropriate indemnification provisions to protect the company from the wage and hour claims of the service provider’s workers
- Maintain basic records on the independent contractor determination process, and the facts used to make that determination such as business licenses, business cards, contractor tax records, project work plans showing limited engagements and correspondence from the contractor
- Avoid giving contractors rights or access that cut against contractor determination, such as internal e-mail accounts, server access, and invitations to employee functions
While there was nothing significantly new in the administrative interpretation, it is a harbinger of things to come and serves as a warning of the agency’s commitment to pursuing misclassification cases. Employers should take a much closer look at their contractor classifications, knowing that it’s going to be a priority on the federal level.
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