DOL Clarifies the Difference Between Employee and Independent Contractor

Who is Considered an Employee Under the DOL’s New Guidance?

Misclassification of employees has been a major labor compliance issue in the last few years, especially with the rise of on-demand companies like Uber and Lyft that connect contractors with instant jobs. As a result, the Department of Labor has issued additional guidance to distinguish the difference between an employee and an independent contractor. And it looks like, under the FLSA, the majority of workers in question qualify as “employees”₁.

Under the new guidance, the DOL stresses the “economic realities” test as the best way to determine if somebody should be classified as an employee or an independent contractor.  There are a number of considerations under the economic realities test, including the extent to how essential the work performed is to the business and the amount of control the worker has over his or her work performed.

For instance, a construction company that builds apartment buildings depends on the work of carpenters. The company’s integral goal is to build. A carpenter plays an essential part in reaching that goal. Therefore, the carpenter would be considered an employee. On the other hand, a construction company may contract a software developer to create a program to help the company track orders and projects. The developer does not play an integral role to the construction company’s main business, but rather, a supplemental one. Therefore, the developer should be considered an independent contractor versus an employee₂.

What Employers Should Do

When it is all said and done, employers should always take the classification of their employees seriously. With the new DOL guidance in place, employers should revisit how they are classifying their employees₄. Simply said, you should assume that almost everyone you pay in exchange for work is an employee, with few exceptions₃. At the end of the day, addressing the classification of your workers now may save you from a costly lawsuit later.

Resources

1. http://www.natlawreview.com/article/department-labor-clarifies-independent-contractor-definition
2. http://consumerist.com/2015/07/16/labor-dept-tries-to-clarify-when-workers-are-employees-or-contractors/
3. http://www.workforce.com/blogs/3-the-practical-employer/post/21454-who-is-an-employee-dol-has-answers-in-guidance-on-independent-contractor-status
4. http://www.jdsupra.com/legalnews/dol-issues-new-guidance-regarding-the-96888/