Avoid an Invasive Audit by Understanding the DOL’s New Independent Contractor Rule
Ever witnessed the US Department of Labor audit a company? It ain’t pretty - and they look at everything.
Unfortunately, audits are not uncommon because a common misconception among employers is that they can decide to classify a worker as an employee or independent contractor. Also not uncommon are disgruntled workers who want to “get back” at the company, so they make a complaint with the DOL that they were misclassified and should have been an employee with all the benefits that go with it.
Avoid this fate by understanding that the classification is determined by the circumstances of the work and is based on certain DOL criteria. These have evolved over the years – especially with the advent of “gig economy” companies like Uber and DoorDash — but the new rule in effect March 11th is intended to bring finality to the criteria.
Here are the DOL’s 6 new criteria with my thoughts on each:
1. The degree to which the employer controls how the work is done. How much supervision is exercised over the employee? If the employer is monitoring the worker and providing feedback, that cuts against contractor. If it simply tells the worker what it needs and does not interact with the worker until they deliver the work product, that cuts for contractor.
2. The worker’s opportunity for profit or loss. If the worker is being paid for the job and is taking on a risk that they will make more or less money from the work (e.g., fluctuating material costs, subcontractor prices, commissions, etc.), that cuts for contractor. If the worker will be paid one amount no matter what, that cuts against contractor.
3. The amount of skill and initiative required for the work. If the worker has specialized skill and can set their own schedule for when they work, that cuts for contractor. If they don’t, that cuts against contractor.
4. The degree of permanence of the working relationship. If the worker is being retained for a set period of time or until the completion of a certain project, that cuts for contractor. If the retention is undefined, that cuts against contractor.
5. The worker’s investment in equipment or materials required for the task. If the worker must provide their own tools and materials (e.g., a tree surgeon using own tools, a cyber threat analyst using own software and computers), that cuts for contractor. If employer provides what is needed for the work, that cuts against contractor.
6. The extent to which the service rendered is an integral part of the employer’s business. If the work performed aligns with the key function of the business (e.g. seamstress at a clothing store, truck driver at a trucking company), that cuts against contractor. If it is not aligned (e.g., landscape gardener at a hospital, computer technician at a church), that cuts for contractor.
No factor or set of factors has a predetermined weight. The DOL intends to release more guidance to help employers comply with the final rule.
My greatest surprise is that a prior criterion – “ability to work for other clients at the same time” – is no longer listed. For instance, as an employee in-house lawyer I could only work for my employer; now as an independent contractor in private practice, I work for dozens of clients on any given day. My suspicion is the DOL does not want the fact that a Lyft driver also works for Uber to fortify their position that they are a contractor.
Understanding these criteria and integrating them into your contracts will be critical to justify the desired classification of independent contractor. For instance, you may decide to require the worker to use their own tools and materials, to allow them to set their own schedule, or to specify a set time period for their work in order to bolster their classification as an independent contractor.