Classifying Independent Contractors
One way employers avoid paying benefits and taxes is to classify employees as “independent contractors.” But this is one of the gravest mistakes an employer can make. Employers may be liable for back wages, overtime pay, liquidated damages, and applicable attorney’s fees. Employers may also be fined and penalized by the Department of Labor and/or the Internal Revenue Service.
Determining whether a worker is an employee or independent contractor is not always easy. It requires a fact intensive investigation and an in-depth analysis of the various regulations and court rulings.
Investigators from the U.S. Department of Labor will determine whether a worker is an employee or independent contractor by examining a number of factors outlined in Fact Sheet #13. These factors include an examination of:
- 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.
The IRS utilizes an extensive 20-factor test — often referred as the “right-to-control test” — to determine whether an individual is an employee or independent contractor:
- Level of instruction – does employer direct when, where, and how work is done?
- Amount of training – does employer require that workers undergo company-provided training?
- Degree of integration – are the worker’s services integrated into business operations?
- Extent or personal services – are particular workers expected to perform the requested services, or can the independent contract assign anyone to do the requested work?
- Control of assistants – does the worker have control over hiring, supervising, and paying helpers?
- Continuing relationship – does the worker continue to work for the employer after a particular task or project has been completed?
- Schedule flexibility – are the worker’s hours dictated by the employer?
- Full time work demanded – is the worker expected to work a set number of hours each day?
- On-site services – is the worker required to work on company premises even if such might not be required?
- Sequence of work – does the employer require that work be performed in a certain way and in a certain order?
- Requirements for reports – does the employer require that worker submit regular oral or written reports?
- Method of payment – does employer pay the worker on an hourly, weekly, or monthly basis?
- Payment of business or travel expenses – does the employer reimburse the worker for business expenses and travel costs?
- Provision of tools and materials – does the employer furnish the tools and materials necessary for the worker to complete the work?
- Investment in facilities – does the worker rely on the company’s facilities to conduct business?
- Realization of profit or loss – does the worker have predetermined earnings, or does the worker realize a profit or loss based on services rendered?
- Multiple companies – does the worker perform provide services at multiple, unrelated companies?
- Availability to public – does the worker make her services available to the general public on a regular and consistent basis?
- Authority to terminate – does the employer have the authority to discharge the worker?
- Right to quit – does the worker have the right to quit? (Independent contractors cannot “quit” or terminate services without liability except as provided for under the contract.)
In the last couple of years, there have been a significant number of cases involving the issue of independent contractors. One such case, decided in January 2013, addressed whether strip dancers were employees or independent contractors. The Kansas state Supreme Court determined that the strip dancers were employees, not independent contractors, because the club management exercised a significant amount of control over the dancers. Another case — in California — involved financial advisers who alleged that they were employees. The federal court disagreed and determined that they were independent contractors.
Employees who believe that they may be misclassified as independent contractors may wish to consult with an attorney or contact the Department of Labor to determine whether they are entitled to back wages, overtime pay, and liquidated damages and, if appropriate, attorney’s fees.
Employers who find themselves on the receiving end of a lawsuit or Wage and Hour complaint are urged to consult with an attorney for assistance.