The news is everywhere: Businesses, driven by a desire to maintain leaner, more efficient operations, are forgoing traditional employment relationships and instead are relying more heavily on independent contractors to fill the ranks of their workforce. The practice is so widespread that many commentators claim we are witnessing the end of the era of the employee. It might be more accurate to say, however, that we’re entering the era of wishful thinking.
It’s certainly understandable that so many businesses see independent contractors as an attractive alternative to employees. Contractors are not entitled to the minimum wage, unemployment insurance, or workers’ compensation coverage. They need not be provided vacation, sick days, or health benefits. If the relationship between the business and contractor sours, business owners can sleep easy at night with the knowledge that neither the Equal Employment Opportunity Commission (EEOC) nor the National Labor Relations Board will come creeping out from under their beds.
Given the many benefits of contractor relationships, many might question why any business maintains employees as part of their workforce at all. The answer is simple: It’s not really up to them.
There’s more to independent contractor status than just the title. Since the advent of employment law, courts, legislatures, and administrative agencies have developed standards to determine when a worker must be considered an employee and when they may properly be considered as something else. To give an example, the U.S. Department Labor issued an Administrator’s Interpretation in July 2015 outlining what it called the “economic realities” test for determining whether an employment or independent contractor relationship exists. The test consists of the following questions:
- Is the work an integral part of an employer’s business?
- Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
- How does the worker’s relative investment compare to the employer’s investment?
- Does the work performed require special skill and initiative?
- Is the relationship between the worker and the employer permanent or indefinite?
- What is the nature and degree of the employer’s control?
Other agencies, including the Internal Revenue Service and the EEOC, have their own tests for determining independent contractor standards. States, including Arizona, Colorado, and Utah, have also entered the fray and have developed their own tests. Like the DOL’s guidance, these other standards involve a balancing of several factors, typically related to the intent of the parties, the amount of direction and control the business exerts over the worker in question, and how independently the worker operates from the business.
Though the tests vary slightly in the specific factors they consider, all relevant agencies agree on a few key things:
1) Employee or contractor status is not necessarily determined by any one factor;
2) Factors other than those listed in statutes or policy guidance may be relevant to determining employee status; and, most importantly,
3) Workers are presumed to be employees until the agencies are persuaded otherwise.
Given the ambiguous nature of the relevant tests, as well as the slight variations in the ways the different agencies approach the issue, properly classifying employees can be a tricky endeavor. However, it is important for employers to take the matter seriously, as misclassification can result in contract, tax, wage, benefit, immigration, workers’ compensation, and other liabilities. In addition, if one agency discovers that an employee has been misclassified, they will notify others. Since 2011, several federal agencies, including the DOL and IRS, began sharing information to help target independent contractor misclassifications and to improve compliance with federal employment laws. Several states, including Colorado and Utah, have also entered into agreements with the DOL to participate in this “Misclassification Initiative,” and will share information related to classification errors.
In light of the existing legal landscape, employers should be wary of reports heralding the end of employment as we know it, for these reports have been greatly exaggerated. Independent contractors are, as they have been since the advent of employment law, the exception and not the rule.
If you have questions your current classification practices, you are encouraged to reach out to your friendly neighborhood MSEC attorney. We are happy to help.