Is Your Independent Contractor Actually An Employee?

by Michelle R. Ferber and Ben McDonald

In July of 2015, the United States Department of Labor stunned the employment world by indicating that most workers qualify as employees under federal law despite being called independent contractors.  Considering the harsh repercussions of misclassification lawsuits, employers are justifiably concerned about how to protect themselves. 

The guidance issued by the Department of Labor indicates that now is the time for employers to scrutinize their employment models to avoid liability for the misclassification of workers.  While the line between independent contractor and employee seems more often blurry than clear, the “economic realities” test is used by courts to help discern employee from independent contractor.  Combined with the most recent Department of Labor guidance, the factors ultimately seek to glean whether the worker is dependent on business of the employer economically, or whether the worker is truly in business for himself.

Using the economic realities test, court’s examine: (1) the permanency of the relationship; (2) the degree of control exercised by the employer; (3) the extent to which the work performed is integral to the employer’s business; (4) the extent of investments of the employer compared to the worker; (5) whether the work performed requires special skills and initiative; and (6) the worker’s opportunity for profit or loss depending on his or her skill.

More confusingly, none of these factors are dispositive and the determination of whether a worker is an employee or an independent contractor is ultimately based on the totality of the circumstances.  Even with the guidance of these factors and the Department’s July announcement, the waters between employee and independent contractor are murky.  With such steep consequences for misclassification, employers must carefully analyze what their employees actually do, rather than what employers think or say employees do in order to protect themselves.

Employers are advised to seek outside help in reviewing worker activities and evaluate the true independence of workers in regard to both the discretion in the performance of work as well as the workers’ economic dependence upon the employer.  Ferber Law is here to help employers navigate these murky waters and help avoid the numerous and extremely costly consequences of facing misclassification suits by workers.  The Department of Labor’s most recent guidance indicates that employers can no longer bury their heads in the sand when it comes to the classification of their workers.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.