Since the Department of Labor (DOL) issued Administrator’s Interpretation 2015-1 on July 15, 2015, regarding the classification of workers as employees or independent contractors, there have been a plethora of comments and communications from trade associations, industry leaders and the legal and accounting communities that have a common theme – employer beware when classifying a worker as an independent contractor.
We cannot overemphasize the importance of the correct classification. As the employer, you need to understand both the IRS and the DOL perspectives on worker classification. Regardless of whether you as the employer or whether the worker wants to be considered an independent contractor, it is important to review the guidance before making the determination. If the classification is wrong, workers have a number of avenues for resolution including anonymously reporting suspected tax fraud to the IRS.
Employers are also required to correct all aspects of federal and state payroll taxes, workers compensation, ACA reporting, COBRA qualified plan contributions and potentially other benefits as well.
Employee v Independent Contractor
Simply stated, according to the DOL, the Fair Labor Standards Act (FLSA) defines “employee” so broadly that the independent contractor classification can only be used for a very narrow subset of workers.
The AI was issued as a follow-through of the collaborative IRS and DOL “Misclassification Initiative”. This initiative was implemented in 2011 and collaborates with the various state agencies and has been credited with the significant increase in wage-hour litigation.
Under IRS guidance, we’ve looked to a 20 factor test to determine whether a worker is an independent contractor or employee. The worker does not have to meet all 20 factors to be an employee. The more control a company exercises over how, when, where and by whom work is performed, the more likely a worker is an employee. http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Defined
The DOL guidance emphasizes the “economic realities” rather than control. Each factor of the “economic realities test” is to be considered under the overarching determination of whether the worker is in business for him or herself (an independent contractor) or economically dependent on the entity for which the work is performed (an employee).
The WHD also explained that independent contractors are “those workers with economic independence who are operating a business of their own. On the other hand, workers who are economically dependent on the employer, regardless of skill level, are employees covered by the FLSA.” The guidance also provides several hypotheticals for employers to utilize when they run their own classification analyses. In making the determination, a checklist mentality cannot be used; rather, all circumstances of the relationship must be considered. http://www.dol.gov/elaws/esa/flsa/docs/contractors.asp
While the AI is not law, it is foundational and will be used by the DOL in its investigation. In 2014, DOL investigations into employee/independent contractor misclassifications resulted in $79 million in recovery for the misclassified workers.
Review the classification of any independent contractors from both the IRS and DOL guidance. We’ve looked at the IRS factors with many clients. That analysis is no longer sufficient.
You must review the classification under the new DOL guidance. We can assist you in understanding the economic realities test and the impact to your bottom line if the contractor should be an employee. We can also recommend legal counsels who specialize in wage-hour and employee matters. Failure to carefully examine the classification of your workers can be very costly. Examine now – before an examination and before litigation is filed by a disgruntled worker.