By now we’re all probably familiar with the changes to contractor designations in California. But did you hear that this week the Department of Labor updated their ruling? It didn’t get much air play but it is of critical importance to businesses in the IT industry.
You can read the whole 187 pages here: Federal Register :: Employee or Independent Contractor Classification Under the Fair Labor Standards Act They took into account and responded to over 55,000 comments and many of those pages document and respond to the comments. I didn’t notice any comments from IT firms, nor are we found in any of the examples. Another reason that we need to ramp up the numbers in the NSITSP, so we can get seats at more tables. Join today. If you want to get involved and help our industry be heard, then become active in our Legislative Committee.
Independent contractors are not protected from employer abuse like regular workers are. There’s no definition of full-time, tax collections, or over-time because they are working as businesses themselves. However, some employers (and yes IT has been in this camp in the past) abuse the definition of independent contractor. This is where the Department of Labor steps in.
They say…
As used in this rule, the term “independent contractor” refers to workers who, as a matter of economic reality, are not economically dependent on an employer for work and are in business for themselves. Such workers play an important role in the economy and are commonly referred to by different names, including independent contractor, self-employed, and freelancer. This rule is not intended to disrupt the businesses of independent contractors who are, as a matter of economic reality, in business for themselves.
Federal Register :: Employee or Independent Contractor Classification Under the Fair Labor Standards Act
Notice that the phrase “as a matter of economic reality” is used twice in the definition. This is a clue of how important that phrase is to the definition.
6 Tests to determine whether someone is an independent contractor
The rule will apply a six-factor test to determine which labor type a person fall into. They also note that one factor is not weighted over another. Overall, it all harkens back to the phrase “as a matter of economic reality”. In theory, all of the tests could be passed but if the reality of the economic matter is that the contractor is dependent on you, then the test could fail.
- Degree of Permanence of the Work Relationship
- Nature and Degree of Control
- Skill and initiative
- Investments by the worker and potential employer
- Opportunity for profit or loss based on managerial skill
Examples
For all of us that aren’t lawyers, probably the easiest way to understand this rule is through the examples provided in the register.
The final rule reiterates that part 795 contains the Department’s general interpretations for determining whether workers are employees or independent contractors under the FLSA. Further, it reiterates that economic dependence is the ultimate inquiry, meaning that a worker is an independent contractor as opposed to an employee under the Act if the worker is, as a matter of economic reality, in business for themself. The final rule explains that the economic reality test is comprised of multiple factors that are tools or guides to conduct the totality-of-the-circumstances analysis to determine economic dependence. The six factors described in the regulatory text should guide an assessment of the economic realities of the working relationship, but no one factor or subset of factors is necessarily dispositive.
Federal Register :: Employee or Independent Contractor Classification Under the Fair Labor Standards Act
The Federal Register provides example for each of the “tests” of whether a person is a contractor or employee.
Example: Degree of Permanence of the Work Relationship
A cook has prepared meals for an entertainment venue continuously for several years. The cook prepares meals as directed by the venue, depending on the size and specifics of the event. The cook only prepares food for the entertainment venue, which has regularly scheduled events each week. The relationship between the cook and the venue is characterized by a high degree of permanence and exclusivity. These facts indicate employee status under the permanence factor.
A cook has prepared specialty meals intermittently for an entertainment venue over the past 3 years for certain events. The cook markets their meal preparation services to multiple venues and private individuals and turns down work for any reason, including because the cook is too busy with other meal preparation jobs. The cook has a sporadic or project-based nonexclusive relationship with the entertainment venue. These facts indicate independent contractor status under the permanence factor.
Example: Nature and Degree of Control
A registered nurse provides nursing care for Alpha House, a nursing home. The nursing home sets the work schedule with input from staff regarding their preferences and determines where in the nursing home each nurse will work. Alpha House’s internal policies prohibit nurses from working for other nursing homes while employed with Alpha House in order to protect its residents. In addition, the nursing staff are supervised by regular check-ins with managers, but nurses generally perform their work without direct supervision. While nurses at Alpha House work without close supervision and can express preferences for their schedule, Alpha House maintains control over when and where a nurse can work and whether a nurse can work for another nursing home. These facts indicate employee status under the control factor.
Another registered nurse provides specialty movement therapy to residents at Beta House. The nurse maintains a website and was contacted by Beta House to assist its residents. The nurse provides the movement therapy for residents on a schedule agreed upon between the nurse and the resident, without direction or supervision from Beta House, and sets the price for services on the website. In addition, the nurse simultaneously provides therapy sessions to residents at Beta House as well as other nursing homes in the community. The facts—that the nurse markets their specialized services to obtain work for multiple clients, is not supervised by Beta House, sets their own prices, and has the flexibility to select a work schedule–indicate independent contractor status under the control factor.
- a. Overview of Control Factor
- b. Scheduling
- c. Supervision
- d. Setting a Price or Rate for Goods or Services
- e. Ability To Work for Others
Example: Extent to Which the Work Performed Is an Integral Part of the Employer’s Business
A large farm grows tomatoes that it sells to distributors. The farm pays workers to pick the tomatoes during the harvest season. Because picking tomatoes is an integral part of farming tomatoes, and the company is in the business of farming tomatoes, the tomato pickers are integral to the company’s business. These facts indicate employee status under the integral factor.
Alternatively, the same farm pays an accountant to provide non-payroll accounting support, including filing its annual tax return. This accounting support is not critical, necessary, or central to the principal business of the farm (farming tomatoes), thus the accountant’s work is not integral to the business. Therefore, these facts indicate independent contractor status under the integral factor.
Example: Skill and Initiative
A highly skilled welder provides welding services for a construction firm. The welder does not make any independent judgments at the job site beyond the decisions necessary to do the work assigned. The welder does not determine the sequence of work, order additional materials, think about bidding the next job, or use those skills to obtain additional jobs, and is told what work to perform and where to do it. In this scenario, the welder, although highly skilled technically, is not using those skills in a manner that evidences business-like initiative. These facts indicate employee status under the skill and initiative factor.
A highly skilled welder provides a specialty welding service, such as custom aluminum welding, for a variety of area construction companies. The welder uses these skills for marketing purposes, to generate new business, and to obtain work from multiple companies. The welder is not only technically skilled, but also uses and markets those skills in a manner that evidences business-like initiative. These facts indicate independent contractor status under the skill and initiative factor.
Example: Investments by the Worker and the Potential Employer
A graphic designer provides design services for a commercial design firm. The firm provides software, a computer, office space, and all the equipment and supplies for the worker. The company invests in marketing and finding clients and maintains a central office from which to manage services. The worker occasionally uses their own preferred drafting tools for certain jobs. In this scenario, the worker’s relatively minor investment in supplies is not capital in nature and does little to further a business beyond completing specific jobs. Thus, these facts indicate employee status under the investment factor.
A graphic designer occasionally completes specialty design projects for the same commercial design firm. The graphic designer purchases their own design software, computer, drafting tools, and rents an office in a shared workspace. The graphic designer also spends money to market their services. These types of investments support an independent business and are capital in nature ( e.g., they allow the worker to do more work and extend their market reach). Thus, these facts indicate independent contractor status under the investment factor.
Example: Opportunity for Profit or Loss Depending on Managerial Skill
A worker for a landscaping company performs assignments only as determined by the company for its corporate clients. The worker does not independently choose assignments, solicit additional work from other clients, advertise the landscaping services, or endeavor to reduce costs. The worker regularly agrees to work additional hours in order to earn more. In this scenario, the worker does not exercise managerial skill that affects their profit or loss. Rather, their earnings may fluctuate based on the work available and their willingness to work more. Because of this lack of managerial skill affecting opportunity for profit or loss, these facts indicate employee status under the opportunity for profit or loss factor.
In contrast, a worker provides landscaping services directly to corporate clients. The worker produces their own advertising, negotiates contracts, decides which jobs to perform and when to perform them, and decides when and whether to hire helpers to assist with the work. This worker exercises managerial skill that affects their opportunity for profit or loss. Thus, these facts indicate independent contractor status under the opportunity for profit or loss factor.
Spoiler alert: It’s time to join the National Society of IT Service Providers