Many businesses, as employers, have experimented with treating their workers as independent contractors in an effort to avoid withholding wages for taxes, social security (FICA) and unemployment insurance, as would be required for workers classified as employees.
The U.S. Department of Labor (DOL) compiled a new six-part test, issued under the Administrator’s Interpretation 2015-1.
- Is the work an integral part of the employer’s business?
For example, a lawyer doing work for law firm may have to be treated as an employee rather than an independent contractor, while the same lawyer providing services for other business enterprises would likely be treated as an independent contractor.
- Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
According to the DOL, this test is unaffected by the ability to work more hours, but is affected by the worker’s opportunity for profit or loss related to the worker’s managerial skill.
- How does the worker’s relative investment compare with the employer’s investment?
The DOL emphasized that a worker’s investment should not be considered in isolation, but rather compared to the investment an employer makes to the overall business. For example, if the worker is an accountant and brings his own computing and calculating equipment, office equipment, such as ledger paper, and other office supplies necessary to perform his or her job, he or she will more likely be treated as an independent contractor than an employee.
- Does the work performed require special skill and initiative?
A worker’s skill set, judgment, intuition and independence prevail over technical skill in determining whether the worker is economically independent.
- Is the relationship between the worker and the employer permanent or indefinite?
The more permanent a worker performs services for an employer, the more likely the worker is an employee, albeit a temporary employee or a part-time employee.
- What is the nature and degree of the employer’s control?
The more independence, judgment and reliance upon developed skill-sets acquired from experience, learning, or education, with the ability to exercise independent managerial and administrative judgment in the way the job will be performed, favors treatment as an independent contractor.
However, many of the job functions overlap, and the application of the six-part test issued by the DOL requires analysis for “best fit” among the criteria outlined by the six-part test.
There are significant penalties for improperly classifying an employee as an independent contractor to avoid the taxes imposed on an employer on behalf of employees. The employer can be liable to the worker for back overtime for a two-year period, or for three years if the misclassification is deemed willful. Further, under the Fair Labor Standards Act, successful litigants can also recoup their attorneys’ fees and costs, which may far exceed the overtime pay they may otherwise be entitled to, if classified as an independent contractor, but later determined by the DOL to be an employee.
Earlier, the DOL relied on a 20-part “control test” that considered whether the worker brought his own supplies, exercised judgment, performed mostly administrative or supervisory work, controlled subordinates, such as assistants, whether the work was typically done by an independent contractor or an employee, and whether the worker controlled his or her hours of work and the manner in which the work was executed. Now, with the six-part test, control is merely one aspect of six considerations applied by the DOL in evaluating a candidate’s entitlement to benefits under the Fair Labor Standards Act, including payment of overtime and the employer’s incurrence of tax liability for withholding of wages, payment of FICA, unemployment compensation insurance and workers’ disability compensation premium. Further, there appear to be proposed changes to the overtime laws which increase the minimum pay, from $23,660.00 per year to $50,440.00, for an employee to be considered salaried and, therefore, exempt from overtime eligibility.
Beginning with the third quarter of 2015, the Taxable Wage Base, which is the maximum annual wage on which an employer must pay unemployment taxes, will be lowered from the current rate of $9,500 to $9,000. This means that non-delinquent contributing employers will pay less in unemployment taxes for the upcoming quarters.
Gerald C. Davis is a partner in our Livonia office where he concentrates his practice on corporate and business law, leveraged buy-outs, company reorganization and refinancing, analyzing investments for joint ventures, intellectual property, and drafting loan agreements. He may be reached at (734) 261-2400 or firstname.lastname@example.org.