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The Daily

DOL Cracks Down on Independent Contractor Misclassification

Chris Gaetano
Published Date:
Jul 17, 2015
ContractorThe Department of Labor, responding to what it says are numerous complaints of employees being misclassified as independent contractors, has issued a memo aimed at clarifying for companies exactly who counts as what in which context, and curbing what it sees as abuse of the system by businesses to shortchange employees. 

While the control factor (how much control does the business have over how the work is done) has often been used to determine who is and is not an employee, the new DOL memo says this should not be "given undue weight." Instead, it said that more consideration should be given to the "suffer or permit" standard which looks at the broader economic relationship between the worker and the company, specifically the degree to which the worker depends on the company for their livelihood, of which the control factor is but one part. 

"The ultimate inquiry under the FLSA is whether the worker is economically dependent on the employer or truly in business for him or herself. If the worker is economically dependent on the employer, then the worker is an employee. If the worker is in business for him or herself (i.e., economically independent from the employer) then the worker is an independent contractor." 

To answer this, the DOL poses the following questions: 

  • Is the work an integral part of the employer's business? The DOL says, for example, that a carpenter is integral to the employer's business, while a software developer who creates programs that assist the company in things like tracking bids, scheduling projects and crews, and tracking material orders is not.
  • Does the worker's managerial skill affect the worker's opportunity for profit or loss? The DOL asks us to consider a worker who provides cleaning services for corporate clients. If the worker performs assignments only as determined by the cleaning company and does not independently schedule assignments, solicit additional work from other clients, advertise services or endeavor to reduce costs, he or she does not exercise managerial skills that affect profit or loss and is, therefore, an employee. By contrast, a worker who produces ads, hires helpers to assist, recruits new clients, negotiates contracts and decides which jobs to perform and when is an independent contractor.
  • How does the worker's relative investment compare with the employer's investment? If the same cleaning worker in the above example is provided a vehicle, insurance and all equipment and supplies by the company, and if that company invests in advertising and finding clients by itself, even if the worker occasionally brings his or her own cleaning supplies, he or she is an employee. By contrast, if that worker receives referrals and invests in a vehicle not suitable for personal use and uses it to travel to various worksites, rents his or her own space to store the vehicle and material, does marketing and advertising, hires helpers for larger jobs, and purchases his or her own materials and equipment, the investment is similar to that of the above mentioned company, and the worker is an independent contractor.
  • Does the work performed require special skill and initiative? A carpenter who does not make any independent judgments at the job site, does not determine the sequence of work, order additional materials or think about bidding the next job, but is rather told what work to perform where, is an employee. If, on the other hand, that carpenter provides a specialized service for a variety of companies, markets his services, determines when to order materials and how much, and determines which orders to fill, then he is likely an independent contractor.
  • Is the relationship between the worker and employer permanent or indefinite?For example, an editor who has worked with a publishing house for years and does edits in accordance with its specifications on its software, and only edits books by that publishing house, is an employee; another editor who works intermittently with 15 different publishing houses and markets her services, negotiates rates for each editing job and turns down work for any reason would probably be an independent contractor. 
  • What is the nature and degree of the employer's control? The example here is an RN who is listed with Beta Nurse Registry, which matches her with clients. The registry interviewed her before joining, required her to undergo a multi-day training presented by that registry, receives a listing each week with potential clients and requires the nurse to fill out a form with the registry before contacting clients. It also requires that the nurse adhere to a certain wage range and stipulates that she cannot provide care during any weekend hours, and must inform the registry if she is hired by a client or will miss scheduled work with a client. In this case, the nurse is an employee. However, if the nurse, listed with the Jones registry, is free to call as many or as few potential clients as desired, and negotiates wages and schedules with them, that nurse is probably an independent contractor.
Under these criteria, the DOL memo says that "most workers are employees." It warned that these factors "should not be analyzed mechanically or in a vacuum," as no single factor, including control, should be over-emphasized. Each factor, instead, should be considered in light of the "ultimate determination of whether the worker is really in business for him or herself (and thus an independent contractor) or is economically dependent on the employer (and thus us an employee)."