Why it’s Becoming Harder for Businesses to Use Independent Contractors

Does your business classify workers as independent contractors instead of employees? You should know that the U.S. Department of Labor is trying to make it harder for all businesses to use independent contractors.

The Department of Labor enforces the Fair Labor Standards Act (FLSA), the federal law that requires most employers to pay employees a minimum wage and non-exempt employees time-and-a-half for overtime.

The key word here is “employee.” FSLA does not apply to independent contractors. They need not be paid time-and-a-half for overtime or even the minimum wage.

The question is—Who is an Independent Contractor?

Initially, it’s up to each business to decide how to classify workers. However, your decision is subject to review by the Department of Labor, other government agencies such as the IRS, and your state unemployment and workers’ compensation agencies.

Bad things can happen if the government decides you’ve misclassified an employee as an independent contractor. The Department of Labor can make you pay back overtime pay for two years (three years if the misclassification is intentional). Your workers can also bring lawsuits for violations.

For FLSA purposes, workers are employees if, as a matter of economic reality, they are economically dependent on the hiring firm. The Department of Labor’s new test contains six factors hiring firms must consider:

1. Opportunity for profit or loss;
2. Investment in facilities and equipment;
3. Permanency of the relationship;
4. Degree of control by the hiring firm;
5. Integration into the employer’s business; and
6. Skill and initiative required.

This test is complex and hard to apply. No one factor is determinative. Rather, you must examine all the circumstances of the relationship.

To make worker classification even more challenging, the Department of Labor test is only one of many. The IRS, for example, uses a more business-friendly right-of-control test. Many states use an even stricter ABC test for workers’ compensation, unemployment, and state wage and hour law purposes.

A worker can qualify as an independent contractor under the IRS test but be an employee under the Department of Labor and state ABC tests.

Does this all sound like a mess? It is.

If you use independent contractors, you should review your relationship in light of the new Department of Labor test.

If your company uses many independent contractors, it should always have them sign an independent contractor agreement with a clause waiving the right to bring or join any class action suit against the company, including suing for workers’ misclassification. The clause can avoid ruinously expensive class action lawsuits brought by plaintiff’s lawyers.