DOL to Revisit Independent Contractor Classifications

Friday, March 04, 2011

Under the current administration, the Department of Labor (DOL) plans to increase the number of auditors and audits directed at reviewing independent contractors and how organizations are classifying and reporting such positions. At issue are organizations, which have designated individuals as independent contractors when in fact those individuals are statutory employees. The drivers include lost employment taxes, benefit eligibility and coverage for health, welfare, retirement plans, and yes penalties. While small organizations may be lulled into a false sense of security due to their size, there are only so many Microsoft’s to go around. Smaller organizations may lack the legal and financial resources to manage independent contractors and to cope with a detailed DOL audit and therefore may be prone to penalties.

The DOL’s FY 2012 budget for the Wage And Hour Division includes the following language: “To support the Department’s theme of expanding efforts to deter and detect worker misclassification WHD proposes an increase of 107 FTE and $15,223,000 as part of an initiative to detect and deter the inappropriate misclassification of employees as independent contractors and strengthen and coordinate Federal and State efforts to enforce labor violations arising from misclassification. Individuals wrongly classified as independent contractors are denied access to critical benefits and protections -- such as family and medical leave, overtime, civil rights laws, and unemployment insurance -- to which they may be entitled as regular employees. Worker misclassification also generates substantial losses to the Treasury and the Social Security, Medicare and Unemployment Insurance Trust Funds. In its last comprehensive estimate of the scope of the misclassification problem for tax year 1984, the Internal Revenue Service estimated that 15 percent of all employers misclassified a total of 3.4 million employees as independent contractors, resulting in an estimated annual revenue loss of $1.6 billion (in 1984 dollars).” Page WHD 20.

In general, the IRS will look at:

Behavioral control.

Who has the right to control how work is done?

What and how work instructions are addressed?

When and where is work done?

What tools or equipment are used?

What workers are be hired to assist with the work and when?

Where, when, and how are supplies, tools, equipment, and services purchased?

What work must a specified individual perform?

In what order or sequence is work performed?

To whom and what training is provided?

Financial control:

Who has the right to control the financial aspects of the work?

What investment is there in facilities, supplies, tools, and equipment?

To what degree does the worker perform services for others?

How and when is the independent contractor compensated for work done?

To what degree can the independent contractor suffer a loss or realize a profit?

Type of relationship:

Are there written contracts describing the relationship?

Does the business provide the independent contractor with employee-type benefits?

What is the degree of permanency of the relationship?

What is the degree to which services performed are the regular business of the company?

The DOL will look at these factors and others in determining whether or not the “facts and circumstances” of the situation supports the organization’s position that the worker is an independent contractor. For any organization, it is essential that they be able to meet the preponderance of these tests. This especially true for small organizations, who may lack the infrastructure to oversee and manage independent contractors effectively.

As with any relationship with local, state or federal rules and regulations, organizations should seek credentialed professional advice and assistance from a credentialed professional legal counsel.