Major Changes to the Independent Contractor Test

New interpretation from the Department of Labor may require you to reclassify some independent contractors as employees

Employee Or Ic

Deciding whether a worker should be classified as an employee or an independent contractor is a critical decision for employers, as a misclassification could mean significant costs. Recently the U.S. Department of Labor made a determination that significantly shifts how employers must classify independent contractors.

Prior to this determination the status of an independent contractor was largely determined by tests focused on the amount of control the individual had over various aspects of his or her work, including their work time, work location, work process, etc. Their autonomy was the primary factor as to whether they were considered a true independent contractor or an employee.

The more recent determination changes the focus for determining the status of an independent contractor from control and autonomy to economic realities, by which they mean the degree that the worker is economically dependent on the employer. In order to make a determination of this level of economic dependence, the Department has issued six factors that should be considered when making the determination*.

Those six factors are:

  1. Is the Work an Integral Part of the Employer’s Business?
  2. Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?
  3. How Does the Worker’s Relative Investment Compare to the Employer’s Investment?
  4. Does the Work Performed Require Special Skill and Initiative?
  5. Is the Relationship between the Worker and the Employer Permanent or Indefinite?
  6. What is the Nature and Degree of the Employer’s Control?

(For detailed explanations and examples, review the interpretation on the DOL website)

These are the factors to consider when making the determination however, per the Department of Labor’s interpretation, there is no formula or qualitative determination that can be made, so employers must reach their own conclusions based on these factors.

HR One can work with you to evaluate these factors in relation to the particular circumstances of relationships you may enter into with workers.  If there is any doubt as to how a worker should be classified then an employer should treat them as an employee in order to avoid the risk of penalties.


 

*It is important to note that this six factor test was created by the Department of Labor. The Internal Revenue Service continues to use their own test to determine the status of an independent contractor. HR One encourages employers to consider both when making a determination as to a worker’s status as an employee or independent contractor.