As an increasing number of U.S. workplaces are restructuring their business organizations, this has created a higher risk of misclassifying employees as independent contractors. This is an important issue for Human Resources departments to pay attention to, as employer misclassification has a direct impact on employee eligibility for benefits, legal protections (such as minimum wage and overtime rights) and taxation.
On July 15, 2015, the U.S. Department of Labor (DOL) issued an administrative interpretation to clarify how to determine whether a worker is an employee or an independent contractor.
The U.S. Department of Labor uses the multi-factor “economic realities” test, outlined below, which focuses on whether the worker is economically dependent on the employer or truly in business for him or herself:
- Whether the worker’s job is an integral part of the employer’s business;
- Whether the worker’s managerial skill affects his or her opportunity for profit or loss;
- Whether the worker’s and the employer’s investments are comparable;
- Whether the work performed requires special skills and initiative;
- Whether the relationship between the worker and the employer is permanent or indefinite; and
- An analysis of the nature and degree of the employer’s control over the worker.
The DOL also emphasized repeatedly that no one factor is determinative and that the factors should not be applied in a mechanical fashion. Rather, employers are encouraged to use the six factors as a guide in their efforts to classify workers correctly.
We hope that you find this information helpful. For an in-depth look at this latest administrative interpretation, please contact the CBG Benefits’ team to receive a copy of our Compliance Bulletin on this topic.
Please note: there are several tests that exist to determine whether a worker is an employee or an independent contractor. Also, states such as Massachusetts have laws that also govern worker classification.