Both companies and those who work for them need to understand the very important differences between being an employee and being an independent contractor. The line can be very thin, but it always exists, and since employees and contractors are treated very differently, the Department of Labor has always tried to provide guidance. It recently published a final rule that attempts to provide clarification.

According to the DOL, the new rule does the following:

  • Reaffirms an “economic reality” test to determine whether an individual is in business for him- or herself (independent contractor) or is economically dependent on a potential employer for work (Fair Labor Standards Act employee).
  • Identifies and explains two “core factors” that are most probative to the question of whether a worker is economically dependent on someone else’s business or is in business for him- or herself:
    • The nature and degree of control over the work.
    • The worker’s opportunity for profit or loss based on an initiative and/or investment.
  • Identifies three other factors that may serve as additional guideposts in the analysis, particularly when the two core factors do not point to the same classification. The factors are:
    • The amount of skill required for the work.
    • The degree of permanence of the working relationship between the worker and the potential employer.
    • Whether the work is part of an integrated unit of production.
  • Addresses whether the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
  • Provides six fact-specific examples applying the factors.

This is just a summary. For those who want the full details and commentary on the rules, the information is available in the Federal Register. But be warned, it runs over 80 technical pages — a testament to the continued complexity of this issue, despite any clarifying statements.

General rules of thumb

The IRS says: “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”

The DOL has pointed out that the U.S. Supreme Court has made it clear in multiple rulings that that there is no single rule or test for determining whether an individual is an independent contractor or an employee: “The Court has held that it is the total activity or situation which controls.” Among the factors that the Court has considered significant are:

  1. The extent to which the services rendered are an integral part of the principal’s business.
  2. The permanency of the relationship.
  3. The amount of the alleged contractor’s investment in facilities and equipment.
  4. The nature and degree of control by the principal.
  5. The alleged contractor’s opportunities for profit and loss.
  6. The amount of initiative, judgment or foresight in open market competition with others required for the success of the claimed independent contractor.
  7. The degree of independent business organization and operation.

Let us know if you have any questions specific to your situation.

Afilliated HR & Payroll

Afilliated HR & Payroll