Misclassification of employees as independent contractors has always been a problem for employers. The federal and state governments have long tried to find misclassification whether to protect worker rights or to maximize revenues to their treasuries. Now we fully expect the Biden Department of Labor (“DOL”) to uptick the attack on misclassification.

There are multiple tests to determine proper classification. The DOL, Internal Revenue Service and state laws all have different tests, ranging from the right-to-control test to the economic realities test. This article addresses the DOL economic realities test.

The focus of the DOL economic realities test is on two core factors:
1. The nature and degree of control over the work; and
2. The worker’s opportunity for profit or loss based on initiative and/or investment.

If either of these factors lean to finding misclassification as an independent contractor and not an employee relationship, the three following guidepost factors must also be examined:
1. The amount of skill required for the work;
2. The degree of permanence of the working relationship; and
3. Whether the work is part of an integrated unit of production.

Although no single factor is determinative, the DOL looks hard at whether the work is part of an integrated unit of production.

So, what can you do to protect yourself as an employer? First look for these red flags:
1. Engaging contractors to perform the same work as employees
2. Engaging contractors for full-time work over a long period of time
3. Prohibiting contractors from working for other companies
4. Treating contractors like employees
5. Controlling when, where or how the contractor performs the work

With those red flags in mind, here is a list of actions you can take to protect yourself:
1. Engage contractors through a third-party
2. Pay by the project, not by the hour
3. Enforce the contract, sure, but do nothing else
4. Never be a contractor’s first or only customer
5. Audit your practices regularly, using the most difficult applicable test

If you have questions about misclassification, please contact Harvey at 402-392-1250 or by email at [email protected].