Just How Independent Is That Independent Contractor?
Let’s say one of your best employees is leaving because her husband found his dream job as a yoga instructor in Idaho. You love her work and she loves working for the credit union. You both decide that she will do work for the credit union as a consultant. She won’t manage anyone and she can work when she wants as long as she gets the special projects assigned to her done on time. She is free to consult for other credit unions as well but probably won’t have the time. Is she an employee or an independent contractor?
With the subtlety of a bull in a china shop, the US Department of Labor yesterday released guidance clarifying the legal test to be used determine if our consultant is an independent contractor or an employee in disguise. If you hire independent contractors, then this guidance is a must read.
Under the Fair Labor Standards Act, if you “permit or suffer” an individual to work then that individual is your employee. (I’m not making this up: Congress says that if you are suffering at the hands of an employer you must be an employee).
Not surprisingly, this antiquated phraseology is not of much use to employers. Over the years it has fallen on the courts and regulators to determine how to apply this language. The purpose of yesterday’s legally binding guidance is to emphasize to employers that the Fair Labor Standards Act has an expensive definition of employee, one that the DOL feels has been misapplied to the detriment of millions of employees denied benefits as independent contractors.
According to the DOL, the ultimate issue to be analyzed in deciding whether or not our consultant is an independent contractor is not how much independence she exercises but how dependent the contractor is on the credit union. As explained in the guidance:
Unlike the common law control test, which analyzes whether a worker is an employee based on the employer’s control over the worker and not the broader economic realities of the working relationship…An entity ‘suffers or permits’ an individual to work if, as a matter of economic reality, the individual is dependent [on the business for which she is working].
To determine whether your employee turned consultant is an employee in disguise, you are going to examine these criteria: the extent to which the work performed is an integral part of the employer’s business; the worker’s opportunity for profit or loss depending on his or her managerial skill; the extent of the relative investments of the employer and the worker; whether the work performed requires special skills and initiative; the permanence of the relationship; and the degree of control exercised or retained by the employer.
Remember these are criteria to be considered, not elements that all have to be present for a person to be an employee. Ultimately, you have to weigh all of these factors and apply them to your situation. As you do so, remember that on both the state and federal level the regulators are emphasizing proper classification of employees in their oversight regimes.
One more thing. The IRS has an interest in seeing that you have properly paid your taxes, so it has its own test to decide whether that consultant you hired is an employee. The IRS still considers factors the DOL doesn’t consider relevant. You can find the IRS’s criteria at.
I will be back on Monday. I hope everyone enjoys their weekend.