Do You Audit Your Independent Contractor Classifications? Don’t let the IRS or DOL do it!

The U.S. Department of Labor’s Wage and Hour Division (WHD) issued an Administrator’s Interpretation (AI) that seeks to restrict companies from the use of independent contractors.  Furthermore it requires employers to reclassify those workers as employees which would be subject to the Fair Labor Standards Act. The Department of Labor (DOL) and the Internal Revenue Service are working together and sharing information that identifies potential misclassification in businesses. 

The DOL continues to use the six factory analysis test:

1. The extent to which the work performed is integral to the employer’s business –
   is the work integral to a business, “even if the work is just one component of the business and is performed by hundreds of other workers”. 
2. Whether the worker’s managerial skills affect his/her opportunity for profit and loss –
   An independent contractor’s opportunity for loss appears to now be a requirement under the test: “it is important not to overlook whether there is an opportunity for loss, as a worker truly in business for him or herself faces the possibility of a loss.”
3. The relative investments in facilities/equipment by worker and the employer –
   “the worker’s investment must be significant in nature and magnitude relevant to the employer’s investment…to indicate that the worker is an independent businessperson.”
4. The worker’s skill and initiative –
   The DOL’s guidance emphasizes a worker’s “business skill, judgment, and initiative” and not his or her technical skills under this factor. 
5. The permanency of the worker’s relationship with the employer –
   The DOL states that “the key is whether the lack of permanence…is due to the operational characteristics intrinsic to the industry.”  As an example, staffing agency workers were viewed as employees given the nature of the industry and the permanency in the working relationship.
6. The nature and degree of control exercised by the employer –
   A company’s exercise of control due to the nature of their business, regulatory requirements, or their desire to maintain high customer satisfaction are not permissible reasons to exert control over independent contractors and still indicate an employee relationship.

References:  (Alfred, R., Passantino, A.J., Bannon, P.J. & Smiley, A.J., 7/15/2015)  DOL Issues Guidance On Independent Contractor Classification Interpreting FLSA Broadly to Cover Most Workers as Employees; Idalski, A. A (SHRM.org 4/1/2015).  Defending Your Independent Contractor Classifications.