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The United States Department of Labor provides guidance to determine if the person engaged to perform services in your business can be regarded as an independent contractor or must be an employee.  To determine the correct classification, the DOL say that an examination must be based on the “economic realities” test, which focuses on “whether the worked is economically dependent on the employer in in the business for him or herself.  An employer must look at multiple factors “in totality.”   Below are the factors the DOL has highlighted.  Test your classification.

(i) Is the Worker’s Efforts An Integral Part of the Business?

“If the work performed by the worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer” and thus is an employee. As noted by the DOL, for instance, a cake decorator employed in a cake selling business and a cucumber picker in a pickle business, are obviously “integral” and thus should be employees. So too, even if the work is just one component of the business or is performed at home or at a customer’s site does make it less integral. A carpenter for a construction company is integral to that business, a software developer for the same company who tracks bids, orders material, and schedules workers may not be integral.

(ii) Worker’s Managerial Skill Affect the Worker’s Profit or Loss?

The fact that a worker can work more hours, thus making “more profit” is not the test according to the Department. Instead, the review may more correctly focus on whether the worker is subject to a real loss. For example, a worker providing corporate cleaning services at locations assigned to her by the cleaning company, but who has no role in scheduling assignments, soliciting work, and advertising services, is not an independent contractor even if she agrees to take on more assignments. In contrast, a worker who has input into those cost factors is exercising managerial control even if in the end she sustains a loss.

(iii) Is the Worker’s Investment Comparable to the Employer’s Investment?

The independent contractor’s purchase of tools and equipment may not be significant investment compared to those made by the employer, and thus, less likely that the independent contractor is correctly classified. Investments like advertising, rent payment, and operating expenses by an employer are likely indicators of an employer-employee relationship, absent a comparable investment by the worker. Using the cleaning services example, DOL has said that supplying cleaning supplies or using one’s own vehicle, would not necessarily make a worker an independent contractor.

(iv) Does the Worker Use Special Skills, Judgment, and Initiative?

While acknowledging that skills possessed by workers like cable installers, carpenters, and electricians, are “technical,” it is the exercise of “business skills, judgment and initiative,” that warrants a classification as an independent contractor. If those technicians, however, are operating their own businesses using those technical skills it is possible for them to be correctly classified as independent contractors. As noted by DOL, the highly skilled carpenter who constructs custom cabinets after marketing himself to a ultimate user, buying the material, and determining how the job is to be performed, is likely an independent contractor compared to an employee who does none of those tasks.

(v) Is the Relationship of the Worker and Employer Indefinite or Permanent?

DOL has said that a true independent contractor will avoid “a permanent or indefinite relationship with an employer;” to do otherwise, makes the worker a “typical at-will employee.” The continuous or repeated work for a particular employer may warrant a conclusion the worker is really an employee, particularly if the relationship continues until the worker is terminated or quits. If the worker works for other employers and does not rely on one employer, it is more likely there is independence in the relationship. If the work being performed lacks permanence due to the nature of the operation (such as through a staffing agency) or is seasonal, the test should take into account the length of the work assignment.

(vi) What Degree of Control is Exercised Over the Worker?

The control factor was. at one time, the primary test for independent contractor status; now it is just one element to be considered. A worker must actually control “meaningful aspects” of a business, which are not only issues of what hours to work or how tasks are performed, but in the context of other factors. The fact that an employer is not constantly looking over the worker’s shoulder is not evidence of independence any more than claiming certain requirements like dress is just “business necessity” and not a matter of control by the employer.

If it is determined that a worker has been misclassified, an employer could be faced with wage claims, overtime claims, obligations to pay for unemployment insurance, workers compensation coverage, and withholdings, as well as providing the employee with the protection of such laws as the Family Medical Leave Act and the Occupational Safety and Health Act.

An employer should examine its relationship of each and every independent contractor. The factors outlined herein provide the guideposts to determine if workers have been properly classified. It is crucial to be objective and thorough in doing this analysis: the question each employer needs to ask: “Can I show the worker is in business for himself or do the facts show the worker is economically dependent on the employer, which makes him an employee?

Once it is determined that a worker is an employee, an employer will need to determine if a particular worker will become an employee or whether the employer should explore a restructuring of its business to enter into appropriate independent contractor relationships, which should include, in part, appropriate written agreements. While there is some concern that changing classifications might trigger claims, which the Department has not addressed to date, the continued failure to acknowledge the necessary change may lead to even more serious consequences.