Independent Contractor (IC) Classification

In a recent DOL Opinion Letter concerning service providers (electricians, plumbers, carpenters, roofers, etc.) who are referred to potential customers (an “Angie’s List” type of rating and referral agency), the Wage and Hour Division (WHD) of the US Dept. of Labor (USDOL) concludes that the service providers are not employees of the rating and referral agency; they are independent contractors (ICs) in this relationship. Although the ruling of the WHD is not surprising,  it does provide a handy explanation of the test for Independent Contractor status, which is worth taking note of.

The WHD uses an “economic dependence” test (also referred to as an “economic reality” test) to determine whether there is an employment relationship or an independent contractor relationship between two parties. If “economic dependence” is found to exist, it is an employee/employer relationship.

When determining “economic dependence”, the Wage and Hour Division considers six factors derived from Supreme Court decisions. They are as follows:

(1) The nature and degree of the potential employer’s control.  For example, where the employer requires a worker to work exclusively for them, restricting the worker’s ability to work for other employers, the employer dictates how the work is to be done, the method to be used, the more likely the worker is an employee.
(2) The permanency of the worker’s relationship with the potential employer.  Permanency can be found where the employer requires a worker to agree to a fixed term of work, or face restrictions or sanctions for leaving the job in order to pursue other opportunities.  The more permanent, the more likely that the worker is an employee.
(3) The amount of the worker’s investment in facilities (where the work is done), equipment, or helpers. For example, if the work is landscaping, does the worker use their own mowers, trimmers, etc. or is that equipment supplied by the employer? The more that investment is made by the worker, the more likely the worker is an IC.
(4) The amount of skill, initiative, judgment, or foresight required for the worker’s
services. The greater the skill level of the job to be done, the more likely that it is an IC relationship. Also, is the worker dependent upon the employer to equip them with the skills necessary to perform the work, or do they bring those skills with them to that employer?  If the latter, this leans towards an IC relationship.
(5) The worker’s opportunities for profit or loss.  Who controls the factors and exercises the managerial skills which determine profit or loss in the work performed?  If it is the worker, it is more likely they are an IC.
(6) The extent of integration of the worker’s services into the potential employer’s
business.  Is the work to be done typically performed by employees of that employer?  Is it the primary purpose of the employer’s business? If so, it is more likely that the relationship is employee/employer.

The opinion makes it clear that no single factor is determinative, and that they are to be considered as a whole. For example, considering factor 2, the fact that a worker is temporary or part-time does not mean that they are an independent contractor. Considering Factor 3, just because a worker uses the equipment and facilities of the employer does not mean that they are an employee.  In each of these cases, the other factors to be considered can sway the determination in the other direction.

As discussed in a previous blog, there appears to be a shift in the policies of the USDOL going forward favoring employers. Certainly greater clarity in the rules to be followed would be welcome.

 

Published by Dave the HR Compliance Guy

Human Resource and legal professional specializing in HR compliance advisory services

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