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Classifying Employees: Employees or Independent Contractors?

With all of this Uber business, the classification of employees as employees or independent contractors has come into the spotlight. Given the evolving nature of labor relations, there is no wonder that some business leaders will take the opportunity to create their own definitions and thus, circumvent certain taxes, labor laws, and other laws affecting the business enviornment (e.g. Affordable Care Act).

In response, the U.S. Department of Labor (DOL) has issued a blog post with new guidance on classifying workers under the federal Fair Labor Standards Act (FSLA). A note regarding insurance…when businesses do not follow the laws they are supposed to follow, it affects their liability, and in some cases their ability to stay insured.

Is Classification of Employees Really a Problem?

Misclassification of employees as independent contractors is increasing. In addition to denying workers statutory protections, this results in lower tax revenues for government and an uneven playing field for employers who properly classify their workers.

Mistakes can be made, but some employees may be intentionally misclassified in an effort to cut costs and avoid compliance with labor laws.

Department of Labor’s Response

The DOL reviews the six-part “economic realities” test of the relationship between a worker and employee that should be used when classifying. This multi-factor test focuses on whether the worker is economically dependent on the employer and thus an employee, or in business for him or herself and thus an independent contractor.

The issue of classifying workers has taken on new importance in an economy where companies like Uber, Lyft and FedEx have built business models that classify their drivers as independent contractors, but some of those drivers contend they are employees.

The six factors or questions in the “economic realities” test include:

  1. Is the Work an Integral Part of the Employer’s Business?
  2. Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?
  3. How Does the Worker’s Relative Investment Compare to the Employer’s Investment
  4. Does the Work Performed Require Special Skill and Initiative?
  5. Is the Relationship between the Worker and the Employer Permanent or Indefinite?
  6. What is the Nature and Degree of the Employer’s Control?

No single factor determines the classification of a worker as an employee or independent contractor. They must be taken together.