Stricter DOL enforcement requires employers and contractors to clearly define who’s in control of the work.
The U.S. Tax Code has reached nearly 75,000 pages. And the list of laws regulating business practices and finance continues to grow—from the Fair Labor Standards Act to the Americans with Disabilities Act, the Equal Employment Opportunity Commission, and the Family and Medical Leave Act. The list goes on.
When Department of Labor (DOL) Wage and Hour Division Administrator David Weil posted an “administrator’s interpretation” document in July, his goal may have been to clarify confusion over the definition of “employee” status. But his document has raised a lot of questions—and legitimate concerns—about what this interpretation means to independent contractors and business owners.
Suzanne Beall, federal legislative director at the National Association of Home Builders, stated recently in an issue of Remodeler magazine, “Contractors need to increase their efforts in explaining why the construction industry needs and uses independent contractors.”
In many cases, small and midsize builders don’t build enough homes to justify hiring full-time employees, she added. But the administrator’s interpretation published in July would not find that a sufficient argument for independent contractor classification for workers. And increased enforcement over the past several months indicates the DOL is taking a harder line on interpreting these standards.
Kelsey Knowles, partner at the Belin McCormick law firm in Des Moines, says the change has been building over the past three to five years at both the state and federal levels. “There are a couple of factors at play,” she says. “On one level, stricter enforcement theoretically means more protection for employees. And practically, economics is a factor. The government receives more tax revenue from employees than from independent contractors.”
Brian Rickert, partner at the Brown Winick law firm in Des Moines, says, “The law isn’t new. The Department of Labor has always looked at this issue because it’s such a fact-specific question: whether an individual is an employee or a contractor. Only employees are entitled to minimum wage and overtime. The IRS has always been interested in the misclassification issue because Uncle Sam collects more tax revenue from employers’ payroll taxes than from contractors paying self-employment taxes.”
Whether the new emphasis on employee status is motivated by concern for employees or by lost tax revenue, the issue remains the same for employers and contractors in the construction industry: Defining worker status correctly, according to the government criteria, is key.
Guidelines for Employers
“Any independent contractor relationships need to be examined,” Knowles says. “And they need to be evaluated according to the DOL-provided guidelines published in July.” (See “How Does the Department of Labor Define Employee-Contractor Status?”)
The DOL standards ask whether the worker is really in business for himself/herself or dependent on one particular employer and the nature and degree of the employer’s control.
Rickert explains that “the biggest criterion from the DOL’s perspective is economic dependence or independence. From IRS’s perspective, it’s control—who has the right to control the who, what, when, where, and how everything gets done.”
He also adds that if, as an employer, you are providing enough work for a contractor that the contractor has no other clients, the DOL would likely consider that contractor an employee. When the “contractor” is that economically dependent, the employer’s control is inherent in that dynamic.
Guidelines for Contractors
“Legally, the issue is more concerning from the employer’s perspective because the penalties are greater. But workers need to be aware of the DOL standards, too,” Knowles says.
“Taxes are the key,” Rickert emphasizes. “If taxes and benefits are being filed properly and minimum criteria are being met, according to the DOL definitions, there’s less likelihood of an audit or review.”
Although a contractor may be entitled to rights and protections as an employee that he or she may not be receiving as an independent contractor, there are drawbacks to that employee status as well. In fact, Rickert says, most independent contractors hold that status by choice. “We don’t run into too many situations where an individual wants to be an employee rather than an independent contractor.”
Despite publicized cases in which employers forced workers to claim contractor status, those situations are rare. “For a worker, you just need to look at what work you’re doing,” Rickert explains. “Is it done on a contract basis? Is it smaller projects for multiple employers? Or do you work 100% for one employer?”
Understanding the DOL criteria and filing taxes properly and on time are the surest way to eliminate any concerns, both Knowles and Rickert advise.
Resolving a Problem
If, as an employer or contractor, you have concerns about independent contractor/employee status, Knowles advises meeting with a labor attorney. “Spending a few hundred dollars to meet with an attorney and ensure all the appropriate bases are covered is a worthwhile investment and much less expensive than any penalties an employer could incur,” she says.
Rickert adds, “Even if an employer is confident that his subs qualify as independent contractors, if they aren’t paying taxes properly, that can be a red flag for the DOL, and it could be a liability for the employer.”
Knowles concludes, “If there’s a potential problem, putting your head in the sand doesn’t help. Addressing it and correcting it is the safest way to protect your business and your employees and contractors, too.”
How Does the Department of Labor define Employee-Independent Contractor Status?
- Work is integral to employer’s business
- Financial investment falls on employer rather than on worker
- Worker-employer relationship is permanent or ongoing
- Employer controls nature and degree of work performed
- Employer controls hours worked
- Employer provides tools and equipment
- Work requires specialized skills
- Worker’s skill affects his/her opportunity for profit or loss
- Worker-employer relationship is indefinite
- Worker controls work performance
- Work controls hours worked
- Worker provides tools and equipment