Misclassification of workers as independent contractors, when they really should be classified as employees, can lead to significant liability. The United States Department of Labor (DOL) continues to push this misclassification issue on the federal level.
Compliance is important because the DOL will seek to ensure that workers are receiving minimum wage for all hours worked, plus overtime. Despite the fact that on a federal level the law has remained relatively unchanged for many years, employers continue to believe that classifying a worker as a 1099 contractor is the only determinative factor. Obviously, a worker who is an independent contractor is also generally not entitled to benefits, including FMLA, medical insurance, etc. Employers therefore have financial incentive to consider workers contractors. Further, many workers prefer the classification, as it enables them to earn a higher wage and can provide tax benefits.
Instead, under the Fair Labor Standards Act, to be considered an independent contractor, courts consider a variety of factors, including:
- The extent to which the services rendered are an integral part of the principal’s business
- The permanency of the relationship
- The amount of the alleged contractor’s investment in facilities and equipment
- The nature and degree of control by the principal
- The alleged contractor’s opportunities for profit and loss
- The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor
- The degree of independent business organization and operation
Employers must weigh all of the above factors when determining whether a worker is an employee or an independent contractor and that there is no set number of factors that makes the worker an employee or an independent contractor. No single factor alone makes this determination, but a good rule of thumb is that a worker who is not a “free agent” to work for other businesses, and who cannot pick and choose when to be at work, is likely an employee.
Employers should also remember that the IRS recently revamped its 20 factor test into a Three-Factor Test: behavioral control, financial control, and relationship control. Regardless of the test used (DOL or IRS), the key is to look at the entire relationship and make a decision supported by the facts of the relationship versus the desires of the parties involved.
This issue can be especially risky for employers who have workers performing the same jobs but classify some as employees and some as contractors. Employers should also consider that there are distinctions between a temporary employee and a contractor. A temporary employee is still a W-2 employee on a short term assignment but works at the direction and control of the employer. While it can be tempting to classify an individual as a contractor, employers must continue to analyze each situation in light of the factors listed above to avoid potential liability for unpaid minimum wage, overtime, benefits (insurance, stock options), etc.
