On July 15th 2015, Department of Labor (DOL) Administrator, David Weil, issued the much anticipated Administrator’s Interpretation 2015-1 clarifying the DOL position regarding the independent contractor vs. employee debate.
The 15 page interpretive memo covered several points the DOL wants employers to understand clearly moving forward. Mr. Weil made it very clear the effort on stopping the misclassification of workers is joint. The key players include: DOL, IRS, and their state level counterparts.
The belief is many employers are misclassifying workers in an effort to dodge the cost of employee maintenance. Employers save money on wages, benefits, unemployment tax, and worker’s compensation premiums when utilizing independent contractors instead of actual employees that are on payroll. Mr. Weil clarified the definition of the word employ (suffer or permit to work) and stated this definition has been upheld in many Supreme Court rulings. Also notable was the mention of the FLSA definition of employer which covers even an agent of a company and does not only encompass the owner or corporation normally considered to be the “employer”.
The definition and clarification of a 6 Factor (A-F) Economic Realities Test was discussed at length. Several court cases and examples were also cited making the point very clear that no one factor alone determines the status of a worker. A common thread in all factors was: Is the worker truly economically independent of the employer? Each of the six factors came in question format and carries a number of considerations that must be made in order to clearly define worker classification. Here are the six questions all employers must consider before determining independent status.
A. Is the work an integral part of the employer’s business?
B. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
C. How does the worker’s relative investment compare to the employer’s investment?
D. Does the work performed require special skill and initiative?
E. Is the relationship between the worker and the employer permanent or indefinite?
F. What is the nature and degree of the employer’s control?
Administrator Weil was very clear that none of the 6 economic realities factors stand alone to determine worker classification. Here are his closing words:
“In sum, most workers are employees under the FLSA’s broad definitions.The very broad definition of employment under the FLSA as “to suffer or permit to work” and the Act’s intended expansive coverage for workers must be considered when applying the economic realities factors to determine whether a worker is an employee or an independent contractor. The factors should not be analyzed mechanically or in a vacuum, and no single factor, includingcontrol, should be over-emphasized. Instead, each factor should be considered in light of the ultimate determination of whether the worker is really in business for him or herself (and thus is an independent contractor) or is economically dependent on the employer (and thus is its employee). The factorsshould be used as guides to answer that ultimate question of economic dependence. The correct classification of workers as employees or independent contractors has critical implications for the legal protections that workers receive, particularly when misclassification occurs in industries employinglow wage workers.”
- Read the full memo for yourself.
- Get training on what each factor means and extract the sub-factors under each of the six.
- Create a guide or checklist based rating system for vetting the 6 factors and their sub-factors.
- Create a policy and procedure for determining classification.
- Train all workers and document your efforts.
- Audit your current contractors for accuracy of classification.
- Flip workers to employee status as required.
- Or, terminate the relationship with unqualified contractors and locate a true contractor.
- Work with consultants, legal counsel or IRS as needed to legally correct errors in payment of taxes and benefits to misclassified workers.
- Document all of your audit findings and corrective action taken. (Proves Good Faith)
Until Next Time, Be Audit-Secure!