Independent contractor status is an increasingly controversial issue. Whether an individual is an employee or an independent contractor can affect the individual’s ability to obtain unemployment compensation, worker’s compensation, and overtime. It also affects whether the employer must withhold taxes and pay the employer’s portion of social security withholding. Both states and the federal government have been cracking down on who may qualify for independent contractor status. For example, Pennsylvania enacted the Construction Workplace Misclassification Act in order to curtail the use of independent contractors in the construction industry, and has been vigorously pursuing perceived violations.
On July 15, 2015, the United States Department of Labor stepped into the fray, issuing guidance on this issue under the Fair Labor Standards Act (“FLSA”). Department of Labor, Administrator’s Interpretation No. 2015-1. The focus of the guidance is that, because the FLSA’s definition of the term “employ” is very broad, most workers are employees, not independent contractors under the FLSA.
The Department applies an “economic realities” test to determine whether a worker is an employee or an independent contractor. All factors of the test must be considered as indicators of the degree of the worker’s economic dependence on the employer. The factors considered are: (1) whether the work is an integral part of the employer’s business; (2) whether the worker’s managerial skill affects his or her opportunity for profit or loss; (3) how the worker’s relative investment compares to the employer’s investment; (4) whether the work performed requires special skill and initiative; (5) whether the relationship between the worker and the employer is permanent or indefinite; and (6) the nature and degree of the employer’s control over the relationship.
Integral to the business.The Department states that, if the work is integral to the employer’s business, it is more likely that the worker is an employee. The Department further notes that courts have found this factor to be compelling. To illustrate this point, carpenters are integral to a construction company’s business, but a software developer creating software to track bids and scheduling is not.
Managerial skills. In determining whether the worker’s managerial skill affects his or her opportunity for profit or loss, the Department stresses that it is not examining whether the worker has the ability to work additional hours. Instead, this analysis turns on whether the worker may be able to enhance the ability for profit, or may have a loss, through the worker’s managerial decisions, such as hiring additional workers, purchasing materials and equipment, advertising, renting space, and managing time tables.
Relative investment. The Department also considers the nature of the relative investments of the employer and the worker. Here, the Department focuses not on the worker’s investment, but instead on how the worker’s investment compares to the employer’s investment. If the worker’s investment is relatively minor, that suggests that the worker may be economically dependent on the employer. The Department cited a case holding that a rig welder’s investment in trucks costing $35,000 to $40,000 was minimal compared to the hundreds of thousands of dollars invested by the employer. While it would seem like this would preclude any finding of independent contractor status under this factor of the test for any workers for a large employer, the Department did provide an example that a worker providing cleaning services and who has invested in a vehicle for her business, rents space to store materials and the vehicle, advertises and markets her services, and hires a helper for larger jobs has made investments that may be indicative of an independent contractor.
Special skills. In looking at whether the work requires special skills and initiative, the Department looks to the worker’s business skills, judgment and initiative, not his or her technical skills. Instead, the Department looks at whether the worker uses independent judgment in determining the sequence of work, ordering additional materials, marketing services, and making bids on additional work.
Permanence. If the relationship is permanent or indefinite, it suggests that the worker is an employee. An independent contractor does not want the dependence that comes with a permanent relationship. However, the Department notes that a lack of permanence does not automatically suggest an independent contractor relationship. Instead, the reason for the lack of permanence must be examined. If impermanence is an operational characteristic of the industry, such as an industry that traditionally uses temp agencies or has seasonal work, the lack of permanence may still suggest an employment relationship. If the impermanence is due to the worker’s own business initiative, that suggests an independent contractor relationship.
Control. If the worker controls meaningful aspects of the work, so that the worker can be viewed as conducting his or her own business, that suggests an independent contractor status. However, lack of control, such as over individuals who work from home and set their own hours, does not necessarily indicate independent contractor status. The Department notes that the degree of control must be examined within the context of deciding whether the worker is economically dependent on the employer. Accordingly, the Department cautions against placing too much emphasis on this factor of the test. Previously, most tests had placed the strongest emphasis on employer control in making determinations of independent contractor status.
The Department concludes that each of the above factors must be analyzed, and no single factor should be overemphasized. The point is to use the factors to determine whether the worker is economically dependent on the employer. Under the above tests, the Department concludes that most workers are employees under the FLSA.
What Does This Mean For You? The Department of Labor’s guidance does not have the force of law. However, it is based on case law and represents how the Department of Labor will be interpreting the law during any Wage and Hour audits of employers, and it does include new emphasis and de-emphasis of certain factors. It also may signal the Department’s renewed efforts to target independent contractor relationships for special scrutiny. Accordingly, employers should review any independent contractor relationships they currently have to see if they will withstand scrutiny from the Department.
If you have any questions about independent contractors, or any other employment or labor law issue, please contact Whitney Rahman at (717) 509-7237 or at firstname.lastname@example.org.
**This update is provided for informational purposes only and should not be construed
as legal advice or as creating an attorney-client relationship where one does not already exist**