August 5, 2015

Employee vs. Independent Contractor: A Critical Distinction, Says the DOL (article)

Many government jurisdictions and agencies have an interest in proper classification of individuals including, but not limited to, the IRS for tax collection purposes, the Department of Labor (DOL) for minimum wage and overtime reasons, various state agencies that regulate unemployment, workers compensation, labor and revenue.  Also not to be forgotten is the importance of proper classification for Affordable Care Act purposes.  Each of these entities has its own definitions of “employee” and “independent contractor” that must be considered. Many of these agencies are working together in their audit programs. For example, the IRS and Department of Labor entered into a memorandum of understanding a few years ago, together with several state agencies, to share information relating to employee status, all of this in an effort to ensure that individuals are properly classified.


On July 15, 2015, the Department of Labor’s Wage and Hour Division (WHD) issued guidance (Administrator’s Interpretation 2015-1) relating to how the Fair Labor Standards Act’s definition of “employ” determines whether workers are employees or independent contractors.  This guidance addresses the application of the FLSA's definition of "employ" and sets forth “economic factors” in determining whether a worker is truly an employee. 


In a nutshell, each economic factor must be considered for each individual.  These factors include a determination of whether:

1.    The individual is economically dependent upon the employer or in business for him/herself;

2.    The work performed by the individual is integral to the employer’s business;

3.    The worker’s managerial skills impact the individual’s opportunity for profit or loss;

4.    The worker’s relative investment is comparable to the employer’s investment, such as deciding to expand the business or reduce the cost structure;

5.    The work to be performed requires special skill and initiative;

6.    The relationship between the worker and the employer is permanent or indefinite; and

7.    The employer controls the nature and degree of work.


Additional guidance on misclassification is available on the WHD’s webpage: Misclassification of Employees as Independent Contractors.


The bottom line: Employers should make certain that their workforce is properly classified, and if an employer has any questions about compliance with federal and state employment status laws, they should consult with their legal and tax advisors.


Related articles:

q  Employee Classification: Make it Proper and Make it Accurate (Benefit Beat, 9/9/2014)

q  What you need to know about plan audits: Employee vs. independent contractor audits (Part I and Part II, CBIZ Blog, 11/18/14). 

The information contained in this article is provided as general guidance and may be affected by changes in law or regulation. This article is not intended to replace or substitute for accounting or other professional advice. Please consult a CBIZ professional. This information is provided as-is with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.


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