Yesterday, Tim Kenneally wrote about the interaction of the federal and state laws. As Tim explained, anytime both federal and state laws apply, the law that affords the employee the most protection is the law that controls. In Tim’s blog, the applicable laws addressed exempt versus non-exempt classifications. But, there are many, many situations in which federal and state laws differ, including leaves of absence, overtime, meals & breaks, COBRA, final pay, and workers’ compensation. It’s the employer’s obligation to know which laws apply; and, it can be daunting.
A recent question about independent contract classification provides another great example of federal and state laws interacting. The Federal DOL recently retracted some Obama-era guidance that had employers erring on the side of caution and categorizing workers as employees. But, many states have state-specific laws with regard to independent contractor classification. In today’s example, we review two states: Wisconsin and Massachusetts. You don’t operate in either state? I urge you to read on nonetheless as the concept remains important: many states have tests that limit the classification of a worker as an independent contract.
Question: Are there some rules that outline what it means to be a contractor versus an employee? Are there guidelines for what a contractor is/is not and what an employee is/ is not?
Determination of the working relationship is a pretty hot topic right now. Some big-name companies like FedEx, Amazon, and Uber have been sued for alleged improper classification of individuals as independent contractors. Unfortunately for our purposes, most of these cases have either settled (so, we don’t know how a court would rule), been dismissed on technicalities, or remain unresolved. To add complexity, in 2015 and 2016 the Department of Labor provided some specific guidance on independent contractors. But, just a few months ago that guidance was retracted by the current administration. This is all to say that it’s not a straightforward answer. Each relationship should be assessed on a situation by situation basis.
At a federal level, both the Department of Labor (DOL) and the Internal Revenue Service (IRS) provide rules for determining the worker’s relationship.
The Department of Labor uses the Fair Labor Standards Act (FLSA) definition of employ very broadly to include “to suffer or permit to work.” This is one of the broadest definitions of employment under the law. When applying the FLSA’s vague definition, workers who are economically dependent upon the business of the employer, regardless of skill level, are considered to be employees, and most workers could be employees. On the other hand, independent contractors are workers with economic independence who are in business for themselves. There are a number of “economic realities” factors that guide the DOL’s assessment of whether an individual should be appropriately classified as an independent contractor. Permanency of the relationship; control; and whether the services rendered are part of the principal’s business are some of the factors.
Three categories are relevant in determining whether the individual would be more appropriately categorized as an employee or independent contractor by the IRS:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? Greater company control indicates an employer/employee relationship
- Financial: Are the business aspects of the worker’s job controlled by the payer (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)? Greater payer control indicates an employer/employee relationship
- Type of Relationship:
- Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Such things would indicate an employer/employee relationship
- Will the relationship continue? An ongoing relationship would indicate an employer/employee relationship
- Is the work performed a key aspect of the business? If the individual is performing work that is a key aspect of the business, an employee/employer relationship may be more appropriate. For example, if a landscape company needs lawnmowing, the individual doing the mowing would be an employee. But, if the owner of several retail shops needs someone to mow the lawns outside the shops, they would hire the mower as an independent contractor, not an employee. This is because the landscape company is in the business of maintaining lawns. But, the retails shops are in the retail business, not the lawnmowing business.
The guidance tells us that all of the above factors should be considered: “There is no magic or set number of factors that makes the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another. The key is to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.”
The 3-category analysis is used now rather than the 20-factor test employed by the IRS for many years.
Unlike the federal law’s broad reliance on any number of factors, Wisconsin gives us specifics. Under WI law, to be properly classified as an independent contractor, all nine of the following factors must be met. The individual must:
- Maintain a separate business
- Obtain a Federal Employer Identification Number or has filed business or self-employment income tax returns with the IRS based on the work or service in the previous year.
- Operate under specific contracts
- Be responsible for operating expenses under the contract
- Be responsible for satisfactory performance of the work under the contracts
- Be paid per contract, per job, by commission or by competitive bid
- Be subject to profit or loss in performing the work under the contracts
- Have recurring business liabilities and obligations
- Be in a position to succeed or fail if business expenses exceed income
The WI department of workforce development provides concise descriptions of each factor and also provides links to cases that further explain the factors. The information is available here: https://dwd.wisconsin.gov/worker_classification/wc/ninepart/
Massachusetts favors the employee status and uses a three prong-test. To be classified as an independent contractor, all three parts must be answered with a “yes.” If any one part is “no,” the individual should be categorized as an employee.
- Is the worker free from the Company’s control and direction in performing the service both under a contract and in fact? To be free from an employer’s direction and control, a worker’s activities and duties must actually be carried out with independence and autonomy. For example, an independent contractor completes the job using his or her own approach without instruction and also dictates the hours that he or she will work on the job.
- Does the worker provide a service that is outside the Company’s usual course of business? Typically, a worker who performs the same type of work that is part of the normal service delivered by the employer may not be treated as an independent contractor.
- Is the worker customarily engaged in an independent trade, occupation or profession? The particular service to be performed must be “similar in nature” to the independently established trade of the worker. An independent contractor must represent his or herself to the public as “being in business” to perform the same or similar services that he or she is performing for the company.
- Each time you form a working relationship, perform an individualized assessment of the relationship.
- Consider the factors outlined by both federal and state laws.
- The law that affords the most protections to the worker applies. Here, that would mean that if the worker would be categorized as an employee under either federal or state law, the worker must be categorized as an employee.
- If you have questions on how to classify workers, we can help. We offer a Position Classification Audit service to identify potential pitfalls of independent contractors and wage and hour issues. It is an efficient and easy way to protect your business. If you would like more information about this service or any other questions, please contact (508) 548-4888 or email@example.com