On September 15, 2014 the federal Department of Labor (DOL) announced several grant awards to states to investigate misclassification of employees as independent contractors in their unemployment programs, Grants to States Announcement.
Employers have an economic incentive to classify employees as independent contractors. Doing so allows the employer to avoid paying payroll taxes, minimum wage or overtime, related business expenses, workers’ compensation insurance, unemployment insurance payments, disability insurance, and social security; nor do employers give meal periods and rest breaks, or comply with the Family and Medical Leave Act (FMLA) when dealing with independent contractors. But, it is against the law to misclassify employees as independent contractors when they are actually employees, it should not be done.
The tests that identify the difference between an employee and an independent contractors can be difficult to apply because there is no one test that controls every situation. In general, the DOL, the Internal Revenue Service (IRS) and states apply the following multi-factor evaluation from the DOL elaws page:
“(1) the extent to which the worker’s services are an integral part of the employer’s business (examples: Does the worker play an integral role in the business by performing the primary type of work that the employer performs for his customers or clients? Does the worker perform a discrete job that is one part of the business’ overall process of production? Does the worker supervise any of the company’s employees?);
“(2) the permanency of the relationship (example: How long has the worker worked for the same company?);
“(3) the amount of the worker’s investment in facilities and equipment (examples: Is the worker reimbursed for any purchases or materials, supplies, etc.? Does the worker use his or her own tools or equipment?);
“(4) the nature and degree of control by the principal (examples: Who decides on what hours to be worked? Who is responsible for quality control? Does the worker work for any other company(s)? Who sets the pay rate?);
“(5) the worker’s opportunities for profit and loss (examples: Did the worker make any investments such as insurance or bonding? Can the worker earn a profit by performing the job more efficiently or exercising managerial skill or suffer a loss of capital investment?); and
“(6) the level of skill required in performing the job and the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise (examples: Does the worker perform routine tasks requiring little training? Does the worker advertise independently via yellow pages, business cards, etc.? Does the worker have a separate business site?).”
There are special provisions for certain types of employees.