DOL Puts Forth Updated Guidance for Employee-Contractor Classifications

The Department of Labor (DOL) is ramping up in preparation for putting its newly hired auditors to work. As of July 15, particularly, the USDOL has issued guidance regarding misclassification of employees as independent contractors. In their commentary on the new guidance, the team at Bond, Schoeneck, and King, PLLC writes, “According to the [Worker’s and Hour Division] WHD Administrator’s opinion, ‘most workers are employees’ under the Fair Labor and Standards Act (FLSA).” With this opinion in mind, what does that mean for employers and their current presumed contract relationships?

In short, misclassifying employees and contractors has direct implications on that employee’s eligibility for benefits, legal protections, and taxation. Important to note, in their interpretation the DOL leans heavily toward the “economic realities” test versus “control” tests when distinguishing contractors and employees.

Under the Economic Realities Test, there are six factors considered. Keep in mind, workers do not need to get a 6 out of 6 on this test in order to be classified as an employee. No one factor is disqualifying in and of itself.

1. Whether the worker is an integral part of the employer’s business
2. Whether the worker’s managerial skill affects his or her opportunity for profit
3. Whether the worker’s and the employer’s investments are comparable
4. Whether the work performed requires special skills and initiative
5. Whether the relationship between the worker and the employer is permanent or indefinite
6. An analysis of the nature and degree of the employer’s control over the worker

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So, what does it all mean? Employers that manage a number of independent contractor relationships need to hold those to the standard of the Economic Realities Test and identify possible areas of audit vulnerability. As with so many things IRS or DOL, employers found in violation of the law will be presumed guilty and laden with the burden of proving their innocence through a formal audit process. Those found in deliberate negligence of the law can expect to receive the full brunt of the compliance blow from the DOL.

For a free report unpacking each of the 6 elements of the economic realities test, fill in the form below and receive the whole report.