Independent contractor status was already under assault and on “the brink of the cliff” as a result of the ACA and the need to correctly classify workers as full time employees (FTE’s). This new DOL interpretation now effectively pushes employers over the edge of the independent contractor cliff.
The big change is this: Previously the DOL combined “direction and control” factors with “economic” factors to determine whether a worker was an independent contractor or an employee. Thus, under the old test, a worker could be an independent contractor if he or she could control the manner of work even though most of his or her income came primarily from one source and the worker did not expend much capitol or resources promoting his or her own business. As of 7/15/15, that is no longer the case. Now if a client or prospect wants to pay a worker on a 1099 independent contractor basis, they better be darn sure that the worker has other sources of income (also works for others) and is expending significant resources promoting his or her “independent” business.
Examples from the new DOL interpretation:
Integral Part of Employer’s Business:
A carpenter framing homes for a construction company would likely be an employee, even if paid on a 1099 basis, because framing homes is an integral part of the construction company’s business. In contrast, a software developer engaged in a project for the construction company to develop software to track bids and construction costs is more likely to be an independent contractor because software development is not integral to the construction company’s business.
Managerial Skill Affecting Profit or Loss:
A worker provides cleaning services for a cleaning company on a project basis. However, all the worker does is provide his labor. He does not schedule assignments, does not solicit work from additional clients, he does not engage helpers to assist him with his work and does not take measures to reduce costs. In short, he does not exercise any managerial skill that affects profit or loss. This worker is an employee and not an independent contractor. Simply working more hours to make more money is not exercising managerial skill.
Relative Investment:
Same scenario as the above, except this time the cleaning service worker uses some of his own cleaning supplies. Not enough. He is still an employee. On the other hand, if the worker invests in his own vehicle just for his cleaning business, rents space to store the vehicle and the cleaning materials, advertises and markets his services, and hires helpers for larger jobs……..then this worker looks more like an independent contractor.
Special Skill & Initiative:
This is the carpenter example again. If the carpenter is just providing his skilled labor and nothing more, then he is most likely an employee. On the other hand, if the carpenter determines the sequence of work, orders the materials, bids on other jobs, decides which orders to fill and when to fill them…… then he is more likely an independent contractor.
Permanent or Indefinite Relationship:
An editor has worked for a publishing house for several years and the company converts her to 1099 independent contractor status. However, she only edits books for her former employer the publishing house. She does not work for other publishing houses, negotiates rates or reviews bids from others. This worker is an employee despite being paid on a 1099 independent contractor basis.
Nature and Degree of the Employer’s Control:
In this example by the DOL, the control factor creeps back in. Here, a home nursing registry engages a nurse on a contract basis but the registry provides all the training, provides the list of clients to visit, sets the wage rate and tells her when to work (what days and hours she can visit clients). This worker is most likely an employee. On the other hand, if the registry merely provides a list of clients to visit but the nurse can negotiate her rate, decide how many clients to visit and when to visit them, then this worker could be an independent contractor.