When appropriate, entering into independent contractor agreements in lieu of employer-employee relationships with workers can be highly advantageous for businesses. These agreements allow businesses to avoid paying for items like FICA contributions, unemployment insurance, workers’ compensation, and overtime compensation.
Increasing Number of Employee Misclassifications
Given the financial benefits of labeling workers as independent contractors, the United States Department of Labor claims that there are an increasing number of workplaces in the country misclassifying employees as independent contractors. In 2010, there were approximately 10.3 million workers classified as independent contractors in the United States according to 2010 U.S. Census data, but were they all really independent contractors?
Legal Tests To Determine Classification of Worker
Different legal “tests” exist for determining whether a worker is an independent contractor or an actual employee, depending on the federal statute in question. For example, the IRS uses the multi-factor “common law” test to determine the degree of control a worker has in the work process for federal tax laws. The U.S. Department of Labor, on the other hand, uses what is called the “economic realities” test to determine if an employee relationship exists for issues like whether an individual is entitled to minimum wage or overtime compensation under the Fair Labor Standards Act. The latter test is the focus of this blog.
U.S. DOL & Wisconsin Laying the Smackdown on Employee Misclassification
In January 2015, the U.S. Department of Labor’s Wage and Hour Division entered into a partnership agreement with the Wisconsin Department of Workforce Development for the purposes of curbing employee misclassification. The Agreement is set to last for three years and creates an environment for free-flowing exchange of information between the state and federal agencies, joint investigations, and mutual assistance to prevent state and federal labor violations through employee misclassification.
Whether or not a worker qualifies as an employee or an independent contractor for the purposes of the US Department of Labor boils down to six factors aimed at deciding whether or not a person is economically dependent on an employer. None of the factors alone are dispositive; rather the economic realities test focuses on the totality of the facts in a case-by-case basis. The six factors considered in the economic realities test are:
- The extent to which the work performed is integral to the employer’s business;
- Whether the worker’s managerial skills affect his or her opportunity for profit or loss;
- The relative investments in facilities/equipment by the worker and the employer;
- The worker’s skill and initiative (business skills as oppose to technical skills);
- The permanency of the worker’s relationship with the employer; and
- The nature and degree of control exercised by the employer.
Whether or not a worker is misclassified as an independent contractor can have significant financial impacts on a business. Many times misclassification violations do not surface until years down the road making employers susceptible to not only paying back pay, but also paying penalties which accrue interest from the date the violation initially occurred. Perhaps now more than ever it is a good idea to re-evaluate worker relationships in light of Wisconsin’s recent partnership with the US Department of Labor.
Contact one of our business attorneys today for any further questions: 920-499-5700.