HR Alerts – Employee or Independent Contractor? A New DOL Interpretation

SOURCE: BASIC
Sept. 2015

To help employers properly classify their workers, the Department of Labor (DOL) has issued a new Administrator’s Interpretation to explain how the Fair Labor Standards Act’s definition of employee should be understood. As opposed to focusing primarily on the amount of control exerted by the employer, as was standard before, this guidance focuses more on the economic realities. According to the interpretation, an employee is a worker who is economically dependent on the employer and not in business for themselves. Most workers are employees, not independent contractors, and many workers presently classified as independent contractors should be reclassified as employees. If you currently assign work to independent contractors or will do so in the future, it would be a good idea to examine the reasons you have for classifying these workers as independent contractors instead of as employees.

The Department of Labor has announced that it will be aggressively pursuing businesses for misclassification of workers. The result of misclassification is that an employer will owe up to three years of back taxes on the misclassified employee’s wages, up to 41.5% of their total income. In addition to owing back taxes, employers could face fines, interest charges, and criminal penalties. The correct classification of workers has not only critical implications for the legal protections that workers receive, but also a significant impact on a company’s bottom line.