New Employee vs Independent Contractor 6-Point Test

Small business insurance

New internet economy requires new test

The U.S. Department of Labor has published a 6-part test to help guide employers in classifying workers as independent contractors or employees. The guide is a result of the the shift in demand for workers in today’s economy. The federal Fair Labor Standards Act sets the standards in classifying workers as independent contractors or employees.

As businesses restructure in adapting to the economic changes since 2008, employer misclassifications of workers has increased. While being classified as an independent contractor can offer advantages for both the worker and the employer, there are instances of deliberate misclassification by employers “ to cut costs and avoid compliance with labor laws,” said David Weil of the DOL Wage and Hour Division.

The DOL test helps determine whether the worker is economically dependent on the employer or in business for him/herself as an independent contractor.

Below is a summary of the 6-parts:

  1. Is the work an integral part of the employer’s business?  If the worker’s role is a fundamental element of the business, the worker is likely economically dependent on the employer. An independent contractor’s work, however, is unlikely to be vital to the organization.
  2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?  An independent contractor can make a profit and experience a financial loss. For example, his or her hiring, purchasing, advertising and other business decisions can affect his or her opportunity for profit or loss. But a worker’s ability to work more hours to earn more money are not affected by his or her managerial skills and no different for an independent contractor than for an employee.
  3. How does the worker’s relative investment compare to the employer’s investment? Independent contractors typically make investments that support the business’ ability to grow, reduce its costs, or expand the reach of its market. An employee’s investment, if any, should be minor in comparison to that of the employer’s. A worker’s investment in the organization is relative and must be compared to the employer’s in determining his/her classification as an independent contractor or an employee.
  4. Does the work performed require special skill and initiative?  The business skills, initiative and judgment of a worker help determine whether he/she is economically independent. Specialized skills in themselves, particularly technical skills, are not an indicator that a worker is in business for him/herself.
  5. Is the relationship between the worker and the employer permanent or Indefinite? If the worker’s relationship with the organization is permanent or indefinite, he or she is likely an employee. Even a working relationship lasting weeks or months suggests some level of permanence or indefiniteness. Independent contractors, however, typically work on a per-project basis for an employer, and not on a continual or repeated basis for the organization as a matter of course.
  6. What is the nature and degree of the employer’s control?  The employer’s control should be analyzed in determining whether or not the worker is economically dependent. An independent contractor controls meaningful elements of the work being performed, and actually exercises it. Technology and advanced monitoring systems may encourage companies to hire workers as contractors but keep stringent control over their job schedules, professional appearance and assigned tasks. Such controls over a worker are an indication of an employer-employee relationship.

Source: “Labor Department’s 6-Part Test for Classifying Employees, Independent Contractors,” 16 July, 2015.

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