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Are Independent Contractors Right for My Business?

independent contractor.jpgThere are many benefits to hiring an independent contractor for an upcoming project. This can include financial savings, increased flexibility and potentially reduced exposure to lawsuits. But before you decide how to staff a particular job, you must make sure that your choice will satisfy state and federal authorities.

Changing Standards

On July 15, 2015 the Department of Labor (DOL) issued Administrator's Interpretation No. 2015-1 addressing what they call "a trend of employers increasingly and improperly relying on workers classified as independent contractors instead of employees." The DOL based their guidance on the Fair Labor Standards Act's general definition of "employ" as to allow to work, 29 U.S.C. 203(g), and the interpretation emphasizes that the appropriate standard is 'economic realities test,' and not the more permissive 'common law control test' which is used by the Internal Revenue Service. This could have significant ramifications for employers going forward.

What's the Difference?

While the 'common law control test' is based almost exclusively on the employer's control over the worker, 'the economic realities test' takes a much broader approach by looking at six different factors:

  1. If the work conducted is an important part of the employer's business;
  2. The worker's chance to profit or loss, depending on the worker's management skills;
  3. The scope of the relative investments of the worker and the employer;
  4. If the work conducted demands particular skills;
  5. Whether or not the relationship is long-term; and
  6. How much control is exercised or retained by the employer regarding the worker.

According to the Department, most workers should be considered employees under these definitions, and not independent contractors. This is a broad and relatively aggressive pronouncement from the DOL. While the interpretation is not legally binding, it is extremely important because courts give great deference to an agency's interpretation of a statute that it enforces. Agency guidance is a good barometer of how a law will be interpreted by the courts in the future. Employers who ignore agency guidance do it at their own peril.

What Now?

In light of this interpretation from the Department of Labor, employers should review their independent contractor relationships against the guidance and re-evaluate the independent contractor relationships that could be potentially at risk based on the DOL's broad interpretation. Employers should reach out to counsel with additional questions or concerns regarding classification of employees or independent contractors if they are uncertain about their workers' classification. The DOL has made clear that it is paying attention to issue and there may be further actions ahead.

Contact Our Attorneys Today

Don't put your business at risk of legal action. Our skilled San Jose business attorneys are ready to assist in the creation, implementation, and maintenance of compliant independent contractor relationships.

Sources:

http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.pdf

https://www.law.cornell.edu/uscode/text/29/203

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