Should you classify someone who works for your small business as an employee or independent contractor?
That question can be among the trickiest you’ll face as a business owner and just got trickier thanks to the Department of Labor’s release of new guidance explaining when and how DOL inspectors will judge an independent contractor to be an employee.
The guidance, issued July 15, 2015, by DOL Wage and Hour Division Administrator David Weil, lays out an “economic realities” test to decide whether a worker is an employee. Weil, said the new guidance doesn’t amount to a change in policy but seeks to clarify that under the Fair Labor Standards Act, the federal wage and hour law, the definition of employee is broader than what some employers might interpret it to be.
DOL’s action underscores the push by the Obama administration and many states to restrict independent contractor classifications and make it harder for bona fide contractors to remain classified as such. And coming on the heels of the recent California decision on Uber drivers, DOL’s focus may incentivize workers to challenge classifications in court and before labor boards. While guidance doesn’t carry the same force as a regulation or statute, you can be sure plaintiffs’ attorneys will eagerly bring copies to court.
Employers who classify all but the clearest of workers as employees should take steps now to review the different tests for determining whether a worker is an employee or an independent contractor. Keep in mind that arriving at a wrong answer—in the eyes of government inspectors, at least—could cost your business thousands. Worker misclassification carries with it costly fines, back taxes, and interest payments.
A key factor in all the tests is whether the worker or the business controls the manner in which the work is performed. The more the company controls where, when and how the work is performed, the more likely the worker is an employee.
Additional considerations for determining a person’s status include the following:
• Employees receive benefits, like insurance, retirement plan access and paid time off.
• Independent contractors generally use their own supplies and equipment to perform the work wherever it is convenient.
• Independent contractors pay their own business and travel expense and taxes.
• Independent Contractors can work for other clients.
If you are unsure about classifying a worker, it’s always a good idea to seek outside legal advice or consult with your tax professional. In the meantime, download a copy of NFIB’s free guide to independent contractors, review NFIB’s webinar on worker classification, and take a minute to watch NFIB’s legal video on the topic.
Updated July 16, 2015