On July 15, 2015, the U.S. Department of Labor (DOL) issued an administrative interpretation to clarify how to determine whether a worker is an employee or an independent contractor. An increasing number of U.S. workplaces are restructuring their business organizations, creating a higher risk of misclassifying employees as independent contractors. Employer misclassification has a direct impact on employee eligibility for benefits, legal protections (such as minimum wage and overtime rights) and taxation.

Traditionally, the DOL has favored using the six-factor economic realities test because this test seeks to determine whether a worker is economically dependent on his or her employer or whether the worker is in business for him or herself. The DOL’s rationale is that if the worker is economically dependent on the employer, the worker should be classified as an employee and protected by employment laws, including the Fair Labor Standards Act (FLSA) and the Family and Medical Leave Act (FMLA). In the administrative interpretation, the DOL emphasized repeatedly that no one factor is determinative and that the factors should not be applied in a mechanical fashion. Rather, the DOL encourages employers to use the six factors as a guide in their efforts to classify workers correctly.

The six factors of the economic realities test are:

1) Whether the worker’s job is an integral part of the employer’s business
A worker that performs activities that are an integral part of the employer’s business is more likely to be dependent on the employer, and, therefore, should be classified as an employee. The courts have found the “integral” factor to be compelling even when the activity in question is just one component of the business or is performed by other workers. For example, the DOL states, “a worker answering calls at a call center along with hundreds of others is performing work that is integral to the call center’s business, even if that work is the same as, and interchangeable with, many others’ work,” even if it is performed away from the employer’s premises.

2) Whether the worker’s managerial skill affects his or her opportunity for profit or loss
To determine profit or loss opportunities, employers should look beyond the job at hand and determine whether the worker’s skills can lead to additional business from other parties or reduce the opportunities for future work. Employers should consider a worker’s decision to hire others, purchase materials and equipment, advertise, rent space and manage timetables. The DOL specifically mentions that a worker’s ability to work more hours and the amount of work available from the employer have “nothing to do with the worker’s managerial skills and do little to separate employees from independent contractors.”

3) Whether the worker’s and the employer’s investments are comparable
An independent contractor should make some investment and undertake at least some risk of loss if he or she is in business for him or herself. The investment should support a business beyond any particular job. These types of investments include furthering the business’ capacity to expand, reducing business cost structure and extending the reach of the independent contractor’s market. Investing in tools and equipment is not an automatic indication of significant investment or that the worker is an independent contractor. If the worker’s investment is relatively minor, the employer and the worker may not be on the same footing and the worker may be economically dependent on the employer.

4) Whether the work performed requires special skills and initiative
When considering a worker’s skill, employers should consider the worker’s business skills, judgement and initiative, rather than his or her technical skills, which are often required to perform the work. Special skills and initiative are indicators of economic independence when the worker can use them in an independent way, such as demonstrating business-like initiative.

5) Whether the relationship between the worker and the employer is permanent or indefinite
Employment that is permanent or indefinite in character suggests that the worker is an employee. Most independent contractors are usually hired to work until a job or a project is complete. Moreover, once a job or project is complete, the independent contractor does not necessarily continue to provide his or her services to the employer. Neither working for others nor having multiple sources of income transforms a worker into an independent contractor.

6) An analysis of the nature and degree of the employer’s control over the worker
An independent contractor controls meaningful aspects of the work he or she performs. This type of control should lead objective observers to conclude that the worker is conducting his or her own business. The DOL asserts that this control cannot be theoretical and explains that what counts is not what the worker could have done, but what the worker actually does. Finally, the DOL warns that the control factor should not “play an oversized role” and dwarf other factors in the economic realities test when determining whether a worker is an employee or an independent contractor.

For questions regarding the classification of employees and how it pertains to the Affordable Care Act (ACA), FMLA and other employee benefit related compliance, please contact your NEEBCo representative.