WHAT CONSTITUTES AN EMPLOYEE AND INDEPENDENT CONTRACTOR
IN ACCORDANCE WITH THE JULY 15, 2015, DEPARTMENT OF LABOR CRITERIA
Dudley and Smith, P.A. has been practicing in Minnesota since 1952 and has experienced Attorneys that will assist both companies and individuals in labor issues. The following is a brief over-view of the July 15, 2015 Department of Labor change in criteria regarding what constitutes an employee and an independent contractor. This change affects many businesses and individuals.
On July 15th, 2015 the Department of Labor – Wage and Hour Division put out an Administrator’s Interpretation regarding the proper application of the definition “suffer or permit to work” to determine if a worker is an employee as opposed to an independent contractor under the Fair Labor Standards Act. (Administrator’s interpretation No. 2015-1) This publication reflects an initiative by the Department of Labor to reduce the number of employees who are mislabeled as independent contractors. According to their website, “Misclassified employees often are denied access to critical benefits and protections to which they are entitled, such as the minimum wage, overtime compensation, family and medical leave, unemployment insurance, and safe workplaces.” This interpretation provides a guide to help determine if someone is truly an independent contractor or if they must be treated as an employee under the Fair Labor Standards Act. The crucial difference between the two types of workers comes down to the “economic realities test” which is whether or not the worker is economically dependent on the employer or in business for himself. The worker will receive a designation as an independent contractor only if the totality of factors indicates that he or she is business for themselves.
In order to gage whether or not someone is in business for himself, the Administrator’s Interpretation lists multiple factors that should be considered. These factors are not to be applied mechanically and should not be viewed as checklist. Rather, the factors should be analyzed relative to each other in order to get a true sense of whether or not the worker is economically dependent on the employer. The Administrator’s Interpretation emphasizes that all the factors should be applied in view of the broad scope of employment relationships to which the Fair Labor Standards Act was meant to apply.
The six factors:
- The extent to which the work performed is an integral part of the employers business.
a. If a worker is integrated into the employer’s business he is more likely to be economically dependent.
b. A worker can still be integral if the same job is performed by many, his job is only one step in the process, or if the work is performed off site/from home.
- The worker’s opportunity for profit or loss depending on his or her managerial skill.
a. If a worker uses managerial skill intended to lead to future profits, he is more likely to be an independent contractor. Examples are strategic decisions related to advertising, hiring others, and purchasing equipment.b. Working more or fewer hours or having control over one’s hours are not “managerial skills.”
- The extent of the relative investments of the employer and the worker.
a. To be an independent contractor a worker should have made some investment that is not relatively minor when compared to the employer’s investment.
b. Simply buying tools/equipment may not be enough.
- Whether the work performed requires special skills and initiative.
a. Having special skills can indicate that a worker is an independent contractor. This refers to business skills, judgment and initiative.
b. Some sort of specialized technical skill is not by itself indicative of independent contractor status.
- The permanency of the relationship.
a. If a relationship is meant to be permanent, this would support that the worker is economically dependent on the employer and therefore is an employee. Someone in business for himself is less likely to take a permanent job.
b. Lack of permanence does not automatically suggest that someone is an independent contractor; the reason for the lack of permanence should be taken into account. Some professions are by nature non-permanent.
- The degree of control exercised or retained by the employer.
a. For an independent contractor relationship the worker must control meaningful aspects of the work to the degree that it is possible he is running his own business.
b. Control must actually be exercised not hypothetical.
c. Again, working from home and choosing one’s own hours does not qualify as meaningful control.
Here is an example of how the distinction between an employee and an independent contractor works:
Worker A is a landscaper. He is affiliated with a landscaping service where potential jobs are sent to him to bid on. He provides all his own supplies, has complete control over which jobs he takes, he can hire as many people to help him as he wants, and he also advertises his landscaping business around town and is free to take jobs that do not come to him through the service. He would be an independent contractor because the totality of the circumstances indicate he is running his own business.
Worker B is also a landscaper. She also is affiliated with a landscaping service. Through the service, jobs are sent to her and she can have flexible control over the hours she works as long as she completes the job by the deadline. She has her own equipment, but she does not have the ability to pick and choose which jobs she takes, and she does not advertise her business or take landscaping jobs separate from the service. If more than one worker is needed for a job, the service will assign more workers. Worker B does not hire workers. In this situation the worker is an employee of the landscaping service because the facts and circumstances indicate that she is economically dependent on the service.
This document was prepared by Joseph Dudley of the Law Firm of Dudley and Smith, P.A. If you need legal assistance in these matters, we have offices in seven locations: St. Paul, Woodbury, White Bear Lake, Blaine, Chanhassen, Burnsville, and Bloomington. Our office telephone number is (651) 291-1717 and my e-mail is firstname.lastname@example.org.
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