It was traditionally the IRS’s regulations on worker status that determined whether to issue a W-2 or 1099 at the end of the year.
The Department of Labor has issued additional guidance in the memo, “Additions to Employee Misclassification Regulation Guidelines,” to clarify how classification of workers should be assessed. The Department explains that employment policies will be evaluated using six different factors such as the degree of employer’s control or right to control the worker and the worker’s investment in facilities.
The law defines economic dependence as having to work for an employer, who provides one-half of the worker’s total income, or the owner of a business that works for less than half the year.
An employee is a person who is economically dependent on an employer, meaning the worker relies on them for their happiness and well-being rather than on customers. An employer who permits or suffers a worker to work for them will be considered the employee’s employer regardless of whether this was planned by the employer or by the worker.
Even if a worker happily agreed to be a 1099, the broadly interpreted wording of the Fair Labor Standards Act may still deem the worker an “employee” if he cannot demonstrate that he is in business for himself.
The Department of Labor says that most workers are employees. This decision by the Department of Labor is sending a warning to companies that they may face enforcement action if they knowingly employ independent contractors.
Why do some people rely on others while others can sustain themselves financially?
Under the Fair Labor Standards Act, there is a lack of sufficient legal framework to determine whether a worker is economically dependent on their employer.
The courts have developed a six-part economic realities test to determine if an employer’s actions are considered “suffering or allowing” on the employee’s behalf or if the worker was operating as his own business. The six parts include:
1) Does the work you do form an essential part of the business that employs you?
The word “integral” is the key word in this sentence. Courts are applying it broadly because any work can be deemed integral to a company. It applies to work that a company does or has done, so anything necessary for the company to provide its finished product or service, no matter how minimal, may be deemed integral.
The graphic designer, who designs brochures for a print design company, is an integral part of the company’s business. They could therefore be seen as an employee. But the accounting company, which provides payroll services to the same design company, would not be considered integral.
2) Is the employee’s managerial skill a major determinant of whether he or she can make or lose money?
When an employee is considered self-employed, the courts look not just at financial factors, but also managerial aspects. The focus isn’t on who pays for what, but rather who makes decisions. Does a worker have the power to make cost savings or efficiencies in their work? A business owner has this freedom, while an employee doesn’t. If a worker can only agree to do tasks or follow instructions, they are more likely to be classified as an employee.
3) Is the worker willing to invest in the work he or she does?
Freelancers who work on-demand are often investing in the possibility of doing more jobs after the current one. Someone who is economically dependent, on the other hand, invests a small amount into what they’re currently working on.
4) Do the workers have the necessary business skills and initiative to be an asset?
Courts will ignore the job-specific technical skills and instead focus on whether or not the worker demonstrates any business acumen. For example, do you order materials, bid new jobs, or manage workflow?
5) Is the worker’s relationship with the employer permanent or indefinite?
Contractors typically have a more temporary job than employees, who could be with their company indefinitely. If there’s no set time frame or predefined tasks with a contractor or freelancer, they will more than likely be ruled an employee, regardless of their length of employment.
6) Is there a significant degree of control on the employee?
The Fair Labor Standards Act says a person must have control over how their work is done in order to be considered an exempt employee. This typically does not happen under common law, but it becomes more prevalent.
As an employer, you might be wondering what this means for your company. The DOL’s administrative memo carries no legal power on its own, and courts are unlikely to find it persuasive unless they’re already inclined to favor the Department of Labor’s point of view. And courts have been trending toward favoring the DOL when enforcing labor law regulations against companies that use independent contractors.
If your business employs freelancers or contractors, it’s a good idea to review your hiring process to make sure you’re within compliance of the present labor laws. Companies need to be sure to update their onboarding process to ensure that their workers are operating as an independent business.
Freelancers should have their own tools, and will ideally not be reimbursed for time spent or for expenses. Freelancers are their own boss and do not have the same benefits as a traditional employee. They should also know the minimum wage for their country of residence.
Freelancer management software is created so that employers can more easily recruit, screen and onboard freelancers. This will help make this workforce even stronger.
If you use a contractor or freelancer to help you at your business, then it’s worth investing in Contractor Management Systems. These systems provide the latest reporting at all times on your freelance workforce.
One challenge many of our customers face is compliance with labor laws. Luckily, Worksuite’s technology has been designed to monitor contractor and freelancer misclassification and provide reports to help them avoid costly mistakes.