Independent Contractors v. Employees: How to Make Sure You’re Classifying Correctly

July 22, 2016
Independent Contractors v. Employees: How to Make Sure You’re Classifying Correctly

In the past, the use of independent contractors was a logical way for small and midsize businesses to reduce labor-related costs and risks in an effort to grow their business. However, the line between who is truly an independent contractor and who is an employee, as defined by the Fair Labor Standards Act (FLSA), has been somewhat murky.

In an effort to cut down on the misclassification of employees as independent contractors, the U.S. Department of Labor (DOL) provides guidance to clarify the standards of the FLSA and how those standards should be applied in order to properly classify a worker as an employee or an independent contractor.

The differences in protections between contractors and employees
When an employee is classified as an independent contractor, the business that is utilizing the contractor’s services does not need to provide the normal benefits to those workers as they would their employees. These benefits can include making sure they are covered by the minimum wage and overtime protections that are provided by the FLSA, pay workers' compensation or unemployment taxes, or offer any benefits such as medical coverage and paid time off.

Determining if a worker is a contractor or employee
According to the DOL,  a number of “economic realities” factors are helpful guides in resolving whether a worker is truly in business for himself or herself, or like most, is economically dependent on an employer who can require (or allow) employees to work and who can prevent employees from working.

When you are analyzing the economic realities factors in determining whether or not a worker is an employee or contractor, the “suffer or permit to work” standard should be viewed as the overarching philosophy behind each of those factors. The DOL defines “suffer or permit to work” to mean that if an employer requires or allows employees to work, they are employed and the time spent is probably hours worked.

These factors include:

  • The work performed is integral to the employer’s business.
  • The worker gains a profit or experiences a loss dependent on their managerial skills.
  • The level of investment of both the employer and the worker in the work being performed.
  • The work being performed by the worker requires special skills.
  • The permanency of the relationship.
  • The amount of control that the employer has over the worker.

The DOL’s interpretation of the FLSA, as applicable to the independent contractor, leads to the conclusion that “most workers are employees under the FLSA’s broad definitions” and that the FLSA’s definition of employment as “suffer or permit to work” justifies the expansive view of the coverage provided under that law.

In the end, while not one of the previously described factors will offer final determination in verifying if a worker is properly classified, these factors should all be analyzed in relation to each other with the understanding of the FLSA’s “suffer or permit to work” standard as the overarching theme of the analysis when trying to determine the ultimate question of whether the worker is economically dependent on the employer or is in fact in business for themselves.

This communication is for informational purposes only; it is not legal, tax or accounting advice; and is not an offer to sell, buy or procure insurance.

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