Need we really talk about employee misclassification during the summer? Last week, one of my swim team friends tells me the HR department at work wants to convert post-doctoral employees into independent contractors (IC) because it would be easier to administer. At the same time, the Department of Labor (DOL) issues new guidelines on the topic. Strange coincidence, or maybe not!
To be sure, independent contractors offer a simpler, sometimes cheaper alternative to having employees. Ask my clients! They hire me as an independent contractor. I work for them on a specific project, say a supervisory training session. When the project is done, I am out. However, reclassifying existing employees as independent contractors sounds risky. This recent publication signals that DOL has not lost its focus on misclassification enforcement.
So here is what the DOL considers to classify independent contractors versus employees:
Is the Work an Integral Part of the Employer’s Business? If the work is essential to your business, it is more likely that the worker is economically dependent on the employer. Work can be integral part of your business even if it is erformed off-site.
Does the Worker’s Managerial Skill Affect the Opportunity for Profit or Loss? Workers who are truly in business for themselves must rely on their managerial skill and good decision making to be successful, not just technical expertise. Workers who face the possibility of sustaining a loss are more likely to be considered independent.
How Does the Worker’s Relative Investment Compare to the Employer’s Investment? A worker who invests significant resources on items such as tools and equipment is more likely to be an independent contractor. However, workers who invest thousands of dollars for work equipment can still be considered employees if their investment is less than the employer’s investment in the overall business.
Is the Relationship between the Worker and the Employer Permanent or Indefinite? Workers who are engaged on a permanent basis are more likely to be considered employees. Note that workers who only work for a set period of time because of the nature of their industry (e.g. seasonal workers) can still be considered employees. The key is whether the relationship between the worker and the employer is temporary because the worker is truly operating independently.
What is the Nature and Degree of the Employer’s Control? Workers are not more likely to be independent contractors simply because they have the ability to control their hours and work independently thanks to modern telecommuting and work-from-home options.
Note that no one factor is determinative. The classification decision should be made on balance, having considered all factors.
In summary, the DOL reiterates “most workers are employees under the FLSA’s broad definitions.” Employee status is the default position. So have your documentation of the rationale supporting another classification when the DOL inspector he comes knocking on your door.
If you have independent contractors permanently on your books, time to review their status. Call me for help if you want time for the pool too!