When is a worker considered an Independent Contractor?

Using independent contractors can be a good way for companies to meet their business goals. However, doing so may put you at risk as the U.S. Department of Labor investigates many instances of contractors as employees.

Addressing this misclassification has become a key government priority. DOL spokeswoman Mary Beth Maxwell recently called “the misclassification of workers as a serious problem for affected employees and employers and to the company.” Additionally, the DOL’s Wage and Hour Division continues to focus with great urgency on misclassification by launching many related investigations and lawsuits.

If your company relies on independent contractors, be proactive in auditing how you use them. Once you have determined the classifications, be sure to update independent contractor agreements. Although these agreements do not conclusively establish independent contractor status, these agreements are an important factor in determining who can be classified as an independent contractor.

The agreements should establish some of the following for the worker and you should enter into a new agreement for each project:

• Uses own equipment and tools
• May perform services for other businesses
• Can assign tasks to others
• Provides his/her own liability insurance and benefits
• Not eligible for employee benefits
• Has his/her own business and tax ID number
• Has the opportunity to receive bonuses or chargebacks

Do not provide independent contractors with job descriptions, business cards, computers, office space or training.

No single factor will determine the outcome of a misclassification inquiry and every work relationship may be assessed differently. But most federal judges apply the following test to determine if a worker is an employee or an independent contractor.

• Does the worker or company control the details of the work?
• Does the worker or company supply the equipment needed to do the work?
• Does the worker have an opportunity to make a profit or suffer a loss in performing the work at issue?
• Is the relationship between the company and worker permanent or temporary, and is the work of an “on again/off again” nature?
• Does the job require worker skill and initiative?

An additional way to help create a good-faith defense and show that the business practices comply with the FLSA is to perform an FLSA classification audit.
Source: SHRM.org