The DOL Tightens the Line on Independent Contractors

On July 15, 2015, the Wage and Hour Division of the United States Department of Labor issued Administrator's Interpretation 2015-1 regarding the classification of workers as independent contractors.  Here is the link:

Noting the confusion created by unclear rules, and the difficulties created due to misclassification, the Administrator announced that the DOL will focus primarily on the issue of economic dependence in determining whether a worker is an independent contractor.  The DOL uses the term "economic realities" but the reality is that the DOL will focus on whether the worker is economically dependent on the principal for his/her livelihood. 

Historically, the DOL and other agencies would examine the issue by using the common law control test.  In other words, who has the right to control the means and methods of operations?  If it is the principal, then the relationship is an employment relationship.  If it is the worker, then the relationship is an independent contractor relationship. 

By changing the focus from the right to control to economic dependence, many more workers will be deemed employees.  A company "permits or suffers" a person to work, and thus creates an employment relationship, when the worker is economically dependent on the principal.  

Of course, the economic realities test is not a bright line rule.  The following factors should be considered when determining whether a worker is economically dependent on the principle:  (1) the extent to which the work performed is an integral part of the principal's business; (2) the worker's opportunity for profit or loss depending on his/her managerial skill; (3) the extent of the relative investments of the principal and worker; (4) whether the work performed requires special skills and initiative; (5) the permanency of the relationship; and (6) the degree of control exercised or retained by the principal. 

What is the impact of this new Interpretation?  Many more workers will be considered employees rather than independent contractors.  If you do business with independent contractors, you should review the relationship to avoid misclassification.