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Misclassification of contractors and employees can be a problem when it comes to workers’ compensation and employment laws. The Department of Labor (DOL) is cracking down on employers who misclassify independent contractors who really should be employees. If you are an employer who hires contractors, the DOL has issued new guidelines to help you.
Everyone needs to be covered
The guidance comes right out of the Fair Labor Standards Act where the identification process is explained. One of the big reasons for the enforcement is to offer the protections to employees for minimum wage, overtime, and unemployment compensation. Recently in New York, Uber and Lyft drivers were determined to be contractors, not employees. However, every state will make its own determination. The DOL offers these six factors for employers to use as a test to differentiate between an employee and a sub-contractor.
The six factors or questions in the “economic realities” test include:
- Is the work an integral part of the employer’s business?
- Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
- How does the worker’s relative investment compare to the employer’s investment?
- Does the work performed require special skill and initiative?
- Is the relationship between the worker and the employer permanent or indefinite?
- What is the nature and degree of the employer’s control?
Source: DOL-Administrator’s Interpretation No. 2015-1
Workers Compensation is necessary
Examples:
- A contractor who hires an auto mechanic to service the company vehicles is not part of the day to day work of the contractor and therefore, the auto mechanic would not be defined as an employee.
- If a cabinet maker, who is hired by a contractor to provide cabinets for a job, hires a part time person to fulfill the order, that worker would be considered an employee.
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