Employers who use contract service providers or independent contractors are now at increased risk of being sued.
The U.S. Department of Labor (USDOL) recently issued an interpretive bulletin aimed at curbing employers’ misclassification of individuals as independent contractors. The USDOL says most independent contractors should be legally classified as employees. An employee misclassified as an independent contractor can sue the employer for minimum wage violations, overtime pay and other benefits. The employer may also owe retroactive contributions for worker’s compensation insurance, taxes, unemployment compensation contributions, etc.
Some employers believe they are legally protected by a written independent contractor agreement. This is a mistake. Written agreements are given little weight in this area of the law. Courts use an “economic realities test” to determine independent contractor status. The facts surrounding the relationship between the worker and the employer trump what is written on paper.
Some important factors used to determine whether a worker is a true independent contractor are set forth below. These factors apply to workers in the field and those performing administrative, office and other non-manual work. No one factor is determinative. The outcome often depends on the number and weight of the factors as they relate to the economic independence of the worker. Only workers who are genuinely in business for themselves may be classified as independent contractors.
1. What is the nature and degree of the employer’s control over the independent contractor? A true independent contractor must control meaningful aspects of their own business and stand as a wholly-separate economic entity.
2. Does the independent contractor have a state Unified Business Identifier (UBI) number? The UBI number is assigned when a person completes a business license application to register with or obtain a license from state agencies.
3. Is the independent contractor legally incorporated and registered with the Secretary of State? (http://www.sos.wa.gov/corps/search_advanced.aspx)
4. Does the independent contractor operate as a wholly separate business entity with a separate set of books, profit and loss statements, etc.?
5. Does the independent contractor perform services for more than one company or person? Performing work for only one company/person suggests there is an employer/employee relationship.
6. Is the independent contractor’s work an “integral part” of the employer’s business? Risks increase when the independent contractor performs similar duties or uses the same equipment as regular employees.
7. Does the independent contractor make its own L&I/Worker’s Compensation and unemployment benefit contributions?
8. Does the independent contractor use its own tools, equipment, materials, etc.?
9. Does the independent contractor’s own managerial and business skills affect whether there will be profit or loss? A true independent contractor has the opportunity not only to make money but to lose it by making poor business decisions.
10. Does the independent contractor regularly exercise independent business judgment (not just decide how many hours they are going to work or how many projects they are going to accept from the employer)?
11. How does the independent contractor’s relative investment compare to the employer’s investment? In order to be a true independent contractor, the worker/independent contractor must make a substantial investment and undertake some risk for loss. Merely purchasing equipment and tools is not enough.
12. Do the independent contractor’s services require special skill and initiative? “Special skill and initiative” refers to business-related entrepreneurial skills and not technical skills.
13. Is the relationship between the independent contractor and the employer long-term or indefinite? A worker/independent contractor who works for the same employer for a sustained period of time is not showing the business initiative that one would expect from a true independent business entity.
Link to USDOL bulletin: http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.htm