Labor Department Has New Test For Independent Contractors

The U.S. Department of Labor has issued a new test for determining whether a worker is an employee or an independent contractor. The six part test focuses on these criteria:

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?

The entire Department of Labor memo can be found here.

A more detailed examination of this test can also be found at the Insurance Journal.

This issue can have great importance to employers and their Workers Compensation insurance premiums, as often employers think that paying a worker via a 1099 rather than a W-2 basis means they don't have to pay Workers Compensation insurance premiums for that worker. In most states, this is wrong, and can lead to very unpleasant surprises when the audit is done at the conclusion of a policy. In fact, this is one of the common causes of what we call "Shock Audits", where the audit bill is unexpectedly much greater than the employer anticipated.

Of course, not all employers are acting out of ignorance when they try to change workers to independent contractors. A story in the Wall Street Journal on June 30 described how some companies try to reduce costs by trying to turn employees into independent contractors.

For those who can't get through the WSJ paywall, here's an excerpt from the article by Laura Weber:

"Employers have long shifted work from employees to independent contractors, often relabeling the workers and slightly altering the conditions of their work, court documents and settlements indicate. Now, businesses are turning to other kinds of employment relationships, such as setting up workers as franchisees or owners of limited liability companies, which helps to shield businesses from tax and labor statutes.

In response, some state and federal agencies are aggressively clamping down on such arrangements, passing local legislation, filing briefs in workers’ own lawsuits, and closely tracking the spread of what they see as questionable employment models.

All this is happening against the backdrop of a broader shifting of risk from employers to workers, who shoulder an increasing share of responsibility for everything from health-insurance premiums to retirement income to job security. Alleged misclassification of workers has been one of the primary battlegrounds of this shift, leading to high-profile lawsuits against Uber Technologies Inc. and FedEx Corp., among others. Both have recently lost or settled big cases. Uber is appealing one decision, and FedEx settled in California for $228 million but is continuing to challenge classification lawsuits in other states."