By Danielle Capilla
Chief Com­pli­ance Offi­cer at Unit­ed Ben­e­fit Advisors

workersThe Depart­ment of Labor (DOL) has issued an “Administrator’s Inter­pre­ta­tion” to assist employ­ers in deter­min­ing if a work­er is an employ­ee or an inde­pen­dent con­trac­tor. The DOL has deter­mined that many employ­ers are incor­rect­ly clas­si­fy­ing employ­ees as inde­pen­dent con­trac­tors, which can harm the work­er and open the employ­er up to var­i­ous lia­bil­i­ties. Unfor­tu­nate­ly, there is no clear-cut check­list or rule in deter­min­ing a worker’s sta­tus. Employ­ers who are unsure about the cat­e­go­riza­tion of work­ers should con­sult their legal coun­sel to review the fac­tors pro­vid­ed by the DOL and its appli­ca­tion to a spe­cif­ic sit­u­a­tion or worker.

The dis­tinc­tion between employ­ee and inde­pen­dent con­trac­tor is impor­tant, as employ­ees are enti­tled to work­place pro­tec­tions such as min­i­mum wage, over­time, and work­ers’ com­pen­sa­tion. Fur­ther­more, under the Patient Pro­tec­tion and Afford­able Care Act (ACA) employ­ees are enti­tled to health ben­e­fits if they work for an applic­a­ble large employ­er and work more than 30 hours a week. The ACA reg­u­la­tions specif­i­cal­ly state that inde­pen­dent con­trac­tors are not con­sid­ered a com­mon-law employ­ee for pur­pos­es of pro­vid­ing health ben­e­fits. Because of the dif­fer­ence in pro­tec­tions offered to employ­ees ver­sus inde­pen­dent con­trac­tors, employ­ers must be care­ful to ensure they do not mis­clas­si­fy an indi­vid­ual. The DOL has found that many employ­ers are also incor­rect­ly label­ing some­one as an “own­er,” “part­ner,” or “mem­ber of a lim­it­ed lia­bil­i­ty com­pa­ny” rather than prop­er­ly deter­min­ing if they are an “inde­pen­dent con­trac­tor” in order to avoid hav­ing to deter­mine the worker’s sta­tus. The DOL was clear that this is inap­pro­pri­ate, and all work­ers should have their title and clas­si­fi­ca­tion prop­er­ly determined.

The DOL’s guid­ance rests on the fact that when deter­min­ing employ­ee ver­sus inde­pen­dent con­trac­tor, courts use a “mul­ti-fac­to­r­i­al ‘eco­nom­ic real­i­ties’ test,” which focus­es on an individual’s eco­nom­ic depen­dence on an employ­er or business.

The DOL advised that the eco­nom­ic real­i­ties test should be applied in view of the Fair Labor Stan­dards Act’s (FSLA) broad scope of employ­ment and the “suf­fer or per­mit” stan­dard; and that the eco­nom­ic real­i­ties fac­tor guides the deter­mi­na­tion on whether the work­er is tru­ly an inde­pen­dent busi­ness or is an eco­nom­i­cal­ly-depen­dent employ­ee. The DOL pro­vides a vari­ety of fac­tors that should be weighed to answer these ques­tions. The fac­tors should be con­sid­ered indi­ca­tors of the broad­er con­cept of eco­nom­ic depen­dence and should not be used as a checklist.

The DOL’s “suf­fer or per­mit” stan­dard broad­ens the scope of employ­ment rela­tion­ships that are cov­ered by the FLSA and, at its core, finds that an indi­vid­ual is an employ­ee if the indi­vid­ual is eco­nom­i­cal­ly depen­dent on the employ­ing enti­ty. The courts look to the eco­nom­ic real­i­ties of the rela­tion­ship, rather than the label the employ­er gives it. An eco­nom­i­cal­ly-depen­dent work­er is con­sid­ered an employ­ee. Some­one who is in the busi­ness for him or her­self is an inde­pen­dent contractor.
For com­pre­hen­sive infor­ma­tion on the fac­tors an employ­er should con­sid­er when deter­min­ing if an indi­vid­ual is an inde­pen­dent con­trac­tor or an employ­ee, down­load UBA’s ACA Advi­sor, “DOL Issues Guid­ance on Clas­si­fi­ca­tion of Inde­pen­dent Con­trac­tors”.

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