Employers wondering whether a person working for them is an employee or an independent contractor recently received helpful guidance from the Department of Labor. The Department of Labor issued a new opinion letter concerning the test it uses when determining worker classification. Minimum wage and overtime laws apply only to employees and not independent contractors. But just because a company issues a worker a 1099 tax form that doesn’t make him an independent contractor. Instead, the Department of Labor explained that it looks at the “economic reality” and not “technical concepts.”
In the opinion letter, the Department of Labor listed six factors it considers in determining a worker’s classification. Employers looking to reduce legal liability would be wise to review these six-factors listed in the opinion letter.
1. The nature and degree of the potential employer’s control. The more control the employer has over the worker, the more likely that the worker is an employee and not an independent contractor.
2. Permanency of the relationship. If the job is temporary, then it is more likely that the worker is an independent contractor. If the job is indefinite, with no specific stop date, then the worker is more likely to be an employee.
3. Investment in facilities, equipment, or helpers. A significant capital investment made by the worker suggests that the worker is an independent contractor.
4. Skill, initiative, judgment, and foresight required. The relevant inquiry is whether the worker is dependent upon the company to equip him with the skills necessary to perform the job.
5. Opportunity for profit and loss. The more opportunity for profit and loss the more likely that the worker is in business for himself and is an independent contractor.
6. Integrality. The final factor is the extent of the integration of the worker’s services into the potential employer’s business. For example, a worker’s services are integrated into a business if they form the “primary purpose” of that business. As an illustration, a worker hired to cut the lawn of a machine shop is more likely to be an independent contractor. But a worker to cut lawns for a lawn maintenance company is more likely to be an employee.
Employee classification is a very complex area of law and one that is easily misunderstood. For further explanation on this or other labor and employment law matters, please reach out to Kirk Huth. You can sign up by clicking on the link below.
Note: This posting is designed to provide accurate information in regard to the subject matter covered. It is provided with the understanding that it is not rendering legal advice or services.
