Independent Contractors vs. Employees

Keeping Your Company and Bank Account Safe by Properly Classifying Your Workforce

Posted by Matthew J. Pelrine, CLCS, NorthStar Insurance Services, Inc., EM NARI Government Affairs Committee on 23 August 2015 | 0 Comments

Over the past several years, the U.S. Department of Labor has worked with state governments to enact written agreements to reduce worker misclassification as independent contractors; The Commonwealth of Massachusetts entered into an agreement in 2011, which was renewed in November of 2014. On July 15, in response to increased complaints from workers alleging misclassification, U.S. Department of Labor Administrator David Weil issued his interpretation of the Fair Labor Standards Act’s “Suffer or Permit” Standard with respect to the topic, asserting renewed efforts to further reduce misclassification and penalize companies intentionally misclassifying employees.  According to Mr. Weil:

When employers improperly classify employees as independent contractors, the employees may not receive important workplace protections such as the minimum wage, overtime compensation, unemployment insurance, and workers’ compensation. Misclassification also results in lower tax revenues for government and an uneven playing field for employers who properly classify their workers. Although independent contracting relationships can be advantageous for workers and businesses, some employees may be intentionally misclassified as a means to cut costs and avoid compliance with labor law.[i]

In Massachusetts, workers must pass the following criteria in order to be classified as independent contractors:

  1. The individual is free from control and direction in connection with the performance of the service;
  2. The service is performed outside the usual course of the business of the employer;
  3. The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

So, what can you do to make sure you are classifying your workforce correctly? Here are several questions to consider[ii]:

  1. Is the work an integral part of the employer’s business?
    • For example, carpentry is an integral part of a remodeler’s business, so carpenters performing work for a remodeling company are unlikely to be considered independent contractors by the government.
  2. Does the worker's managerial skill affect the worker's opportunity for profit or loss?
    • For example, a worker without ultimate control over which projects to take on or how many hours worked is unlikely to be considered an independent contractor by the government.
  3. How does the worker's relative investment compare to the employer’s investment?
    • Does the worker use his/her own tools and equipment? Does he/she pay for their website?
  4. Is the work performed specialized?
    • Having a special skill is not enough for independent classification, although a carpenter who custom-crafts cabinets for multiple construction firms, markets his services, orders the materials, and chooses which orders to fill and which to pass on, though, is exercising skills common to independent contractors.
  5. Is the relationship between the worker and the employer permanent or indefinite?
    • Independent contractors typically work for multiple clients. If the worker does jobs only for one company, does the work according to instructions from the employer, and uses the firm’s equipment, the worker most likely is an employee and not an independent contractor.
  6. How much control does the employer have?
    • If workers are financially dependent on the employer and fall under the other criteria for an "employee" classification, and the employer exercises "meaningful aspects of the work performed," then the government will probably consider that worker an employee.
  7. Has the worker formed his/her own business entity?
  8. Does the worker have their own website?
    • Websites are a strong indicator of independent work, and certainly support classifications as independent contractors.

Make no mistake: the Department of Labor is cracking down on employee misclassification. The DOL has a strong history of holding employers accountable for back wages to misclassified employees, in addition to levying harsh penalties and fines. Beyond legal ramifications, misclassifying employees as independent contractors can lead to astronomical additional premium charges following workers’ compensation audits.

The clock is ticking on employers who have managed to evade penalties for misclassifying employees as independent contractors. In conclusion, properly classifying your workforce up front saves you from debilitating legal and financial ramifications in the future.



[i] Weil, D. (2015). The Application of the Fair Labor Standards Act’s “Suffer or Permit” Standard in the Identification of Employees Who Are Misclassified as Independent Contractors (2015-1). Washington, DC: Department of Labor. Retrieved from http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.pdf.

[ii] O’Malley, S. (2015). Status Update: 6 DOL Guidelines for Independent Contractor Classification. Retrieved from: http://www.constructiondive.com/news/status-update-6-dol-guidelines-for-independent-contractor-classification/402572/.

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