You’ve started a business and things are booming! Now you need help getting all the work done. Do you hire an employee or an independent contractor? What’s the difference and why does it matter?
In short, the United States Department of Labor (DOL) puts restrictions on labeling workers as independent contractors to protect those workers. The Fair Labor Standards Act (FLSA) governs minimum wage, overtime pay, and other items related to employee compensation—the key word there being “employee.” The FLSA doesn’t apply to independent contractors (ICs). ICs do not have employment taxes taken out of their paychecks, nor are ICs eligible for unemployment or workers’ compensation.
For businesses, the simpler requirements for ICs can be great! The IC performs the work, the business pays them a contract rate, and very little else is required. But the DOL wants workers to receive those added protections and benefits, so it does not allow businesses to make just anyone an IC.
How do you know if someone is really an IC instead of an employee?
The DOL has put forth several different tests over the years trying to define what makes someone an IC rather than an employee. Recently, they published a proposed rule with history and analysis totaling 58 pages! The bottom line—you must look at the “economic reality” of the way the person is working for the business.
Previously, the DOL had stressed looking at (1) the nature and degree of control over the work and (2) the worker’s opportunity for profit or loss. The DOL listed other factors but promoted these two as the “core factors”, carrying greater weight in any analysis.
The DOL has reevaluated this approach, and its most recent proposed rule (for which the comment period is closed) puts forth six, equally weighted factors for consideration. They are:
- Opportunity for profit or loss depending on managerial skill
- Investments by the worker and employer
- Degree of permanence of the working relationship (including exclusivity)
- Nature and degree of control (i.e. scheduling, supervision, price setting, and ability to work for others)
- The extent to which the work performed is an integral part of the employer’s business
- Skill and business-like initiative
I’m not convinced this new rule brings with it the clarity the DOL desired. At the end of the day, when determining if someone should be classified as an employee or not, I fall back on the old adage, “If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.”