The Challenge of Defining an Independent Contractor - nextSource

Over the years, the Department of Labor (DOL), individual states, and the courts have attempted to establish a clear, unified definition of an independent contractor. While similar, each varies enough to cause employer confusion and increased litigation.

While this is not a quick and easy definition in a dictionary, most definitions are based on the “economic reality” of the relationship between the employer and the individual, considering six, non-exclusive factors:

• Control over the work.
• The individual’s opportunity for profit or loss.
• The individual’s investment in facilities and equipment.
• The permanency of the relationship between the parties.
• The skill or expertise required by the individual.
• Whether the work is “part of an integrated unit of production.”

The DOL continues to be embroiled in a legal challenge regarding its delay of the “IC Final rule”, enacted at the end of President Trump’s term and originally set to go into effect in March 2021. The DOL is now considering the publication of a new Final Rule. However, it would apply only to the analysis under federal law and would not affect how states determine who qualifies as an independent contractor under their statutes. To add to the confusion, a new final rule would not redefine who qualifies as an independent contractor under the Internal Revenue Code, the National Labor Relations Act, or other federal laws.

The growth of gig workers is further complicating the definition. A bill that would introduce a new type of work arrangement – the “Worker Flexibility and Choice Act” – was introduced in the US House of Representatives last month. Modeled after work arrangements in some European locations, it aims to combine the flexibility of independent work while allowing businesses to offer workplace benefits traditionally only available to employees. Similar bills proposed in Massachusetts and California were struck down by the courts as they would effectively eliminate minimum wage and overtime compensation protections.

nextSource Insights

• Establish a formal process for Independent Contractor (IC) classification that is based on the IRS standards and state statutes, whichever is most stringent.
• Utilize the services of an employment attorney, IC compliance service, and or automated compliance system to ensure continuous adherence to changing legislation.
• Establish a written statement of work for each independent contractor. Re-evaluate independent contractor personnel each time there is a change to the statement of work.
• Reassess all IC personnel annually. Fully document the assessment instrument, process, and results in case of a government audit or litigation.