For employers, business planning involves hiring workers. Incorrectly designating an employee as an independent contractor can also have serious penalties from the U.S. Department of Labor and the Minnesota Department of Labor & Industry.
Independent contractors do not receive workplace protections available to employees such as the minimum wage, overtime wages, unemployment insurance and workers' compensation. Employers do not have to pay withholding taxes for these workers. Accordingly, businesses often misclassify these workers by accident or design. The USDOL claims that most workers should be classified as employees.
The USDOL and courts use the economic realities test to help determine whether a worker is an independent contractor or an employee. This test is comprised of several factors that helps indicate whether a worker is an employee, or suffered or permitted to work for an employer, because of economic dependence on an employer or whether the workers are in business for themselves. In July, the USDOL updated its interpretation of independent contractors because of increased misclassification reflecting larger restructuring of business entities.
The first factor under the economic reality test is whether the work is an integral part of the employer's business. Secondly, it should be determined whether a worker has an opportunity for profit or loss with a focus on whether the worker's or the employer's managerial skill affects this income.
Next, courts consider the worker and employer's relative investment while ruling on whether the worker is in business independently or for a business organization. If the worker's investment is relatively minor, it would appear that the worker is an employee.
A worker's business skills, judgment and initiative helps determine whether the worker is economically dependent. Specialized skills do not necessarily designate the worker as an independent contractor or employee.
A permanent or indefinite relationship with a business often indicates that the worker is an employee because independent contractors usually forego these relationships to remain independence.
Finally, the employer's control of the meaningful aspects of the work is performed. However, technological advances and enhanced monitoring allows employees to work off-site and under less stringent controls over items such as attire and scheduling.
Statutory and regulatory compliance is an important component of business formation and growth. Legal assistance can help with business planning to assure that business complies with labor standards and avoid legal prosecution.
Source: U.S. Department of Labor, Wage and Hour Division "Administrator's Interpretation, No. 2015-1," Assessed July 25, 2015