Richard McGee (website)


Yes, it matters.

Big Brother, The Man and the Government believe that when employers classify a worker as an independent contractor the employer is making that choice to intentionally avoid employer responsibilities to the worker, the government and others.  By intentionally misclassifying workers as independent contractors, the employer can avoid minimum wage and overtime, taxes and some liability for the contractor’s actions.  Of course there are other employers misclassifying workers from lack of insight on the issue, but whether the misclassification is intentional or innocent, getting it wrong violates the rules and can be very costly in back taxes, penalties, fees, back pay, sanctions and overtime pay.  The best way to avoid misclassifying workers is to study the rules and with that insight, diligently and prudently apply the rules to all workers.

This week, the federal Department of Labor published revised rules regarding its analysis of what is a properly classified independent contractor.  Those rules are effective on March 11, 2024.  In these regulations, the DOL has adopted the so-called economic reality test that uses many factors to evaluate whether a worker is an employee or independent contractor.  Here is a brief overview of some of some of those factors.

In evaluating whether a worker is an employee or an independent contractor, a factor is whether the employer has the right to control the means and manner of performance of the work.  In evaluating the relationship with a worker, the more the employer controls the means and manner of employment, the more compelling the argument that the worker is an employee.  On the other hand, if there is evidence of little control over the worker, there may exist an independent contractor relationship.  For example, when employers require the worker to report to work at a specific time, perform tasks in a specific way, follow its dress code and work behind the employer’s desk, the employer is exercising control over the worker.  The more control translates to classification as an employee.  

Additional factors that contribute to evaluating a worker’s status include: mode of payment, providing materials or tools, control of the premises where work is performed, right to terminate, withholding of income and social security taxes, whether the work is part of the regular business of the employer, the length of the relationship and the intent of the parties.

Another critical aspect in getting the classification correct focuses on whether the employer or the worker has the burden of providing the facts to support the existence of an independent contractor relationship.  There is a presumption that workers are employees (not independent contractors) and the burden of proving the existence of a true independent contractor rests with the employer.  In measuring the weight of that burden, employers evaluate the ingredients addressed above through the lens of the following questions the answers to which will influence your conclusion as to the proper classification of the worker.

Who cuts the check to compensate the worker?  Accounts payable ordinarily pay independent contractors while payroll departments pay employees.

In cutting the check, are taxes and social security withheld?  Employers have an obligation to withhold taxes and social security at the time employees are paid.

Does the worker report to a supervisor?  The frequency of employer contact with a worker may provide evidence of an employer-employee relationship.  Like the other variables discussed here, workers should be evaluated on a case by case basis before drawing any specific conclusions regarding their status.

What is the measurement of performance?  Independent contractors are measured by fulfilling the defined scope of work.  Employee performance is measured by the standards in job descriptions, policy manuals and trained expectations.  More scrutiny of performance augers in favor of an employee classification.

Does she work hand in hand with other employees?  Five workers, comprised of an independent contractor and four employees, tasked with a series of common objectives, is evidence that the independent contractor is misclassified.

Does the worker use your tools?  As a general proposition independent contractors bring and use their own tools while employees use tools provided by the employer.

Does the worker offer his services to others?  Independent contractors ordinarily work for you and a bunch of other clients.

Does the worker’s contract include a job description or a defined scope of work?  Documenting the relationship as an independent contract reveals the intent of the parties, but the inclusion of a job description in that contract describes the work of an employee.  Consistency demands that independent contracts describe expectations through a scope of work.

Does the worker attend orientation?  Employees attend orientation.

Is the worker entitled to extra pay for extra hours?  Employees may be entitled to extra pay for extra hours.  Independent contractors may be entitled to extra compensation for completing the scope of work quicker than expected.

Does the worker execute an acknowledgement of employer’s policies and procedures?  Employees agree to follow employment related policies. Having said that, employers must protect employees from misbehaving independent contractors (think sexual harassment) therefore the inclusion of promises in an independent contract which protect your employees from your contractors is a good idea.

Do you require workers to wear the employer’s uniform and sanctioned underwear?  Uniforms are for employees.  Underwear is for employees and independent contractors.

Does the worker interact with you under her own corporate banner? Independent contractors frequently interact by using a corporate or trade name.

Has the worker been drinking your coffee for a long time?  Employees drink your coffee everyday for years from a stained ceramic cup while loitering in the employee kitchen.  Traditionally independent contractors are on site less than employees and the coffee is consumed from a styrofoam container.  The point, independent contractors do not report to your worksite everyday for years since most contractors work for others as well.

Does the worker have their own employer identification number (tax ID number)?  Independent contractors frequently report income to the IRS under the umbrella of a separate employer identification number.

Is the worker licensed by the gaming commission as an employee or vendor?  Independent contractors are likely vendors under the regulator’s rules.

Of course the list is not exhaustive in assisting your analysis of properly classifying a worker but it provides a good start in the conversation.

Recommendation:  If the DOL, IRS or another governmental entity scrutinizes your classification of a worker as an independent contractor, the right answers to these questions based on the facts will reduce the employers potential liability. With the benefit of the facts of the relationship, look beyond the independent contractor label and determine whether the label is correct or should be changed.  The burden is on you as the employer’s representative to get this right.

May I assist you and your team with drafting policy, evaluating handbooks, training, assisting with hiring, firing and discipline; performing investigations of employee misconduct and importantly sorting out the employee-independent contractor issue?