The Push for More “Employees,” Fewer “Independent Contractors”

August 17, 2015

By Alex E. Jones

“Most workers are Employees under the Fair Labor Standards Act” – that was the conclusion of a recent Department of Labor (DOL) Administrator’s Interpretation.  Employers, however, have increasingly been using independent contractors in their workforces. Employers often prefer using independent contractors because, among other reasons, they do not have to contribute to independent contractors’ insurance or retirement plans. This trend has prompted concerns related to worker rights because independent contractors are by and large exempt from many labor laws, such as workers’ compensation and the Fair Labor Standards Act’s requirement of time-and-a-half pay for overtime.

Coming on the heels of the DOL Administrator’s Interpretation is the proposed Payroll Fraud and Prevention Act of 2015, which attempts to address perceived issues stemming from the increasing reliance on the independent contractor classification. The proposed Act aims to prevent worker misclassification (i.e. when employers mistakenly classify true employees as independent contractors).

Different government agencies rely on a variety of tests to determine workers’ proper classification. The recent DOL Administrator’s Interpretation implemented an “economic realities test.” The test weighs six factors: (1) how integral the work is to the employer, (2) the worker’s opportunity for profit or loss, (3) investments made by the employer and/or worker, (4) whether special skills are a requirement for employment, (5) the permanency of the relationship, and (6) the degree of control exercised by the employer. The ultimate goal of the economic realities test is to determine whether a worker is an employee who is economically dependent on his or her employer or is an independent contractor that is in business for him or herself.

The IRS uses an 11-factor test (previously 20-factor), organized into three categories: (1) behavior control, (2) financial control, and (3) the type of relationship. The IRS will look at the extent to which an employer controls how a worker completes his or her work. It will look at how a worker is paid and whether he or she is reimbursed for expenses. Finally, it will look at the relationship as a whole. The IRS looks for contracts between the parties and tries to gain an understanding of the permanency of the relationship.

The proposed Act would create new reporting requirements for employers. One of the key provisions requires employers to provide classification notices to all of their workers regardless of their status. The notice needs to (1) inform individuals whether they are classified as an employee or non-employee, (2) direct them to the DOL website for further information, and (3) instruct them to contact the DOL if they suspect they have been misclassified. Individuals who are not provided a classification notice are automatically deemed to be an employee. Employers who violate the law would be subject to an $1,100 fine per violation. The fine increases to $5,000 if the violation is found to be repeated and willful.

The Republican control of Congress makes it unlikely the bill will pass in 2015. However, Presidential candidate Hillary Clinton addressed the issue in a July campaign speech, referring to the increasing use of independent contractors as part of the “gig” economy. The ride sharing service Uber has also been in the political spotlight for classifying all of its drivers as independent contractors. This topic could garner national attention as the 2016 election approaches.

The important message to employers is not related to whether the proposed statute is actually adopted.  It is that employers need to properly classify their workers.  They should review and evaluate the classification of their workers as employees or independent contractors, and make sure that they have done so appropriately, in order to reduce the likelihood of an investigation and to avoid potential penalties from the DOL and/or the IRS under existing law.