Employee vs. Independent Contractor – June News from DOL

The month of June saw a significant development from the Department of Labor (DOL) regarding the ongoing classification of employees versus independent contractors. As you are aware, this distinction is an important one with significant implications for taxes, overtime pay and other benefits.

On June 7, the DOL withdrew a 2015 administrative interpretation on classifying workers as employees or independent contractors, effective immediately. In practical terms this changes nothing from the employer side; you still must properly classify all workers as before. The DOL, in fact, stated that it “will continue to fully and fairly enforce all laws within its jurisdiction, including the Fair Labor Standards Act.”

So why bother to withdraw a guideline if there are no material changes as a result? The change, in effect, removes the DOL from the equation of guidance making this determination, leaving employers to look to tests established by the courts. Some believe that removal of the interpretation may give employers more flexibility in applying these tests to classify workers.

While several such tests exist, the primary one favored by the DOL is the economic realities test, best summed up as follows: the more an individual depends financially on an employer, the more likely it is that the individual should be categorized as an employee.

The most common factors in applying the economic realities test are:

1. The degree of the employer’s right to control the manner in which work is performed;

2. The degree of skill required to perform the work;

3. The worker’s investment in the business;

4. The permanence of the working relationship;

5. The worker’s opportunity for profit or loss; and

6. The extent to which the work is an integral part of the business.

With this move, the DOL returns to relying on judicial interpretations of this test.

Questions about employee classification? Contact Consolidated Insurance.