DOL Guidance on Independent Contractors – Economic Realities Factors

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We are focusing on the nature of an independent contractor, as well as the misclassification of independent contractors and the risks associated with this employment issue.  The Department of Labor or DOL has released an “interpretation” on applications of the Fair Labor Standards ACT or FLSA defined as “Economic Realities Factors”.   This guideline informs some of the tactics and measures the DOL and the IRS are using to determine whether a worker should be classified as an independent contractor or an employee.

The “Economic Realities Factors” takes a different approach from the traditional classification model of an independent contractor.  In the old model, the primary questions came down to the control the provider of the work had over the independent contractor, when and how the work was completed, and the tools or technology they provided.  Today, the attorneys at the Watkins Firm are advising our employment clients that the IRS and DOL are much more concerned about the nature of the economic relationship between the company providing the work and the independent contractor.

For example, does the independent contractor have their own business entity?  Was a specific collegiate degree or professional license required in order to do the work?  If so, your designation of “independent contractor” is holding up.  If your independent contractors do not have their own business entity and are conducting work as individuals, this will be a red flag to the DOL and IRS.  The difficulty and sophistication of the work to be performed is another measure.  If it is common work requiring little skill, the DOL and IRS are likely to challenge independent contractor status.

The critical economic questions focus on several aspects of the relationship between the parties including:

  1. What percentage of the provider’s work is conducted by independent contractors?
  2. How does the business savvy and managerial skill(s) of the independent contractor affect their ability to control profit or loss?
  3. What percentage of the income of the independent contractor comes from the work provider?
  4. How long has the relationship between the work provider and the independent contractor existed?
  5. What investment has the independent contractor made in their own business entity?  How does that compare to the investment made by the work provider?

Governmental authorities and taxation agencies are seeking revenue desperately.  The issue of misclassification of independent contractors and the application of the “Economic Realty Factors” poses great risk to many San Diego employers.  The wage and hour attorneys at the Watkins Firm are prepared to review your current status and help to protect your interests and prevent misclassification of independent contractors.  If you are concerned about misclassification of employees we invite you to call for a free and substantive consultation at 858-535-1511.