Employee vs contractor. When it comes to pay, taxes, and employee benefits worker classification matters.
On July 15th, the Department of Labor (DOL) issued an administrator’s interpretation emphasizing the importance of worker classification and clarifying the difference between employees and independent contractors.
New DOL Clarification on Independent Contractors
The recent DOL interpretation (Administrator’s Interpretation No. 2015-1) is significant because it clarifies the difference between an employee and contractor.
To summarize, the DOL emphasizes that:
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Under the FLSA, most workers are employees.
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The primary approach to determining whether a worker is an employee or a contractor is the “economic realities” test, explained below.
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An employer’s exertion of control over the tasks performed by the worker is less important.
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The DOL will continue to aggressively examine the classification of workers as contractors.
Employee vs Contractor - Economic Realities Test
The economic realities test looks at whether the worker is economically dependent on the employer or in business for him or herself.
To conduct an economic realities test an employer should look at six factors:
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The extent to which the work performed is an integral part of the employer’s business.
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The worker’s opportunity for profit or loss depending on his or managerial skill.
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The extent of the relative investments of the employer and the worker.
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Whether the work performed requires special skills and initiative.
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The permanency of the relationship.
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The degree of control exercised or retained by the employer.
Related: How to Recruit - Prepare to Hire Before You Take the Plunge
Conclusion
If your small business uses independent contractors, or you are considering going this route, it is important to make sure you are classifying workers correctly.
Under new guidance, the DOL has stressed that most work should be performed by employees. Additionally, more emphasis is being placed on the economic realities test.
What questions do you have about the difference between employees and contractors? Leave a question below.
