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Employees vs. Contractors

 

Classification of Employees vs. Independent Contractors

On July 15th, 2015 the U.S. Labor Department’s Wage and Hour Division released guidance on the classification of workers as either Employees or Independent Contractors. This document was based on the Fair Labor Standards Act’s “Suffer or Permit” Standard. It stated that the misclassification of employees as Independent Contractors is on the rise in workplaces across the nation. With companies like FedEx and Uber recently being sued for mistreatment of their workers, the Wage and Hour Division hopes to curtail companies adding themselves to the list of rule violators.

Why is classification important?
Correctly classifying a worker as an Employee or Independent Contractor is important for a couple reasons. First off is the deprivation of employee benefits as an independent contractor. The company you work for is not required to provide you with the company’s basic employee benefits such as worker’s compensation, health and unemployment insurance, and sick leave as an Independent Contractor. Companies are not required to pay you overtime (or even the minimum wage) as they would for a regular employee. Also, classifying a worker as an Independent Contractor instead of an Employee can mean lower taxes for the business by avoiding the employer portion of Social Security, Medicare, or state unemployment taxes.

All of these points make it very attractive for companies to categorize their workers as Independent Contractors in order to cut costs, but stay as productive as possible. Recently there have been many companies attempting to make the switch from full-time employees to independent contractors. The Wage and Hour division has a long list of complaints from workers who feel that they have been mistreated by businesses classifying them as non-employees.

What makes a worker an Independent Contractor as opposed to an Employee?
Most businesses evaluate three key factors when determining if a worker is considered to be an Independent Contractor or an Employee. The evaluation of these factors leads to the concept of Economic Independence. Economic independence is a determination of whether a worker could economically survive with or without the company . If a person’s main source of income comes from a single company, they are most likely an employee and considered to be economically dependent. On the other hand, if a person has many sources of income from a variety of clients, that person should be considered to be an Independent Contractor and is economically independent from the business.

If a person works for a company and is coming in to work on a regular employer set schedule with an indefinite end date that consumes a majority of that persons available working hours, and is preforming work that is an integral part of the day to day business of the company, then this person would most likely be considered an employee due to the economic dependence he or she has on the business.

If the same person was brought in from an outside source to do the job for a set period of time and then the person moved on to do similar work for other companies, then this person would most likely be considered as an Independent Contractor due to the lack of economic dependence on a single company.

Is the worker in business for themselves or for the company?
There is no clear mathematical formula for determining if a person is an Independent Contractor or not. If a worker owns their own business and is providing services through that business, most likely that person is an Independent Contractor. In some situations the line that divides owning your own business and being an employee can be a little blurry. As a result, the courts use the Economic Realities Factors as a guide for issues such as these. The document recently released by the Wage and Hour Division presented six key questions to ask in order to determine a worker’s classification and a detailed description with references to court cases supporting each point. The six questions are:
•    Is the work an integral part of the employer’s business?
•    Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
•    How does the worker’s relative investment compare to the employer’s investment?
•    Does the work performed require special skill and initiative?
•    Is the relationship between the worker and the employer permanent or indefinite?
•    What is the nature and degree of the employer’s control?

Unfortunately, this is a very judgmental way to determine if a worker is an Employee or not. If you are unsure of whether a worker is an Employee or an Independent Contractor, it is wise to reassess the worker’s situation and potentially seek professional advice on the worker’s status.

Where can I ask questions?
If you have any questions or would like further clarification on the topic of whether or not a worker is an Employee or an Independent Contractor, you can reach out to Sensiba San Filippo at info@ssfllp.com or (408) 286-7780.

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    Evan Stephens

    Tax Manager

    EStephens@ssfllp.com
    408.286.7780