“Independent contractor” is more narrowly defined according to a lengthy July 15, 2015, Department of Labor (DOL) interpretive memorandum. The narrower definition might change the previous classification of many workers from independent contractors to employees.
The DOL deemphasizes the degree to which a business controls an individual’s work and focuses instead on a six-factor economic realities test. Factors to be applied in a qualitative analysis of each situation include:
- 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.
Business advisors caution:
- The economic realities test may appear understandable at first blush, but a careful reading of the guidance reveals there are no bright-line rules.
- The same person could be considered an independent contractor or an employee simply based on the business. The DOL guidance highlights a comparison:
- A highly skilled carpenter provides carpentry services for a construction firm, but the carpenter does not determine the sequence of work, order additional materials or think about bidding for the next job. Instead, he is told what work to perform where. This carpenter, although highly skilled technically, is not an independent contractor.
- By contrast, a highly skilled carpenter who provides a specialized service for a variety of area construction companies may be an independent contractor if the carpenter markets his services, determines when to order materials and the quantity of materials to order and determines which orders to fill.
- The subjective nature of such a test is a slippery slope and provides no practical, objective criteria on which businesses can rely.
- Contractors should not have internal e-mail accounts, should not be given server access and should not be invited to employee functions.
The key recommendation is for business owners to review the guidance and confirm that individuals they plan to pay on a 1099 basis in fact meet the new criteria. Maintain basic records: independent contractor determination process and facts used to make that determination; business licenses; business cards; project work plans showing limited engagements; correspondence; etc.