Trying to answer the “is he or isn’t he (an employee)?” question has frustrated employers for years. A primary source of this frustration is that there is NO uniform definition of an employee or an independent contractor. The test for employment status varies depending on the law involved (e.g., federal wage and hour laws define these terms differently than comparable state laws; the test in New York for unemployment insurance is different than the test for workers’ compensation). Thus, someone could be an independent contractor under some laws but an employee under others.

This frustration has been magnified because government law enforcement agencies (including the United States Department of Labor [“USDOL”]) view the misclassification of employees as independent contractors as “one of the most serious problems facing affected workers, employers and the entire economy.” According to the USDOL Misclassification Initiative (http://www.dol.gov/whd/workers/misclassification):

Misclassified employees often are denied access to critical benefits and protections to which they are entitled, such as the minimum wage, overtime compensation, family and medical leave, unemployment insurance, and safe workplaces. Employee misclassification generates substantial losses to the federal government and state governments in the form of lower tax revenues, as well as to state unemployment insurance and workers’ compensation funds. It hurts taxpayers and undermines the economy.

The USDOL is working with the IRS and many states (including New York) to address this issue. New York Attorney General Eric Schneiderman is the lead prosecutor on the Governor’s Misclassification Task Force. In Fiscal Year 2015, USDOL investigations recovered more than $74 million in back wages for more than 102,000 workers in industries such as the janitorial, temporary help, food service, day care, hospitality and garment industries.

We strongly recommend that all employers who work regularly with independent contractors review a helpful analysis of this issue (known as Administrator’s Interpretation No. 2015-1) published by the USDOL on July 15, 2015. It explains how employers can evaluate whether a person truly is an employee or an independent contractor.

As noted in the conclusion of the Interpretation, the ultimate determination is whether the worker is really in business for him or herself (and thus is an independent contractor) or is economically dependent on the employer (and thus is its employee). Factors salient to this determination are contained in the Interpretation, however, the “devil is in the details” (i.e., how the relevant facts apply to these factors).

Salient factors include, but are not limited to:

  • the extent to which the work performed is an integral part of the employer’s business;
  • the worker’s opportunity for profit or loss depending on his or her managerial skill;
  • the extent of the relative investments of the employer and the worker;
  • whether the work performed requires special skills and initiative;
  • the permanency of the relationship; and
  • the degree of control exercised or retained by the employer.