NEW INDEPENDENT CONTRACTOR CRITERIA

Steven Cesare, Ph.D.

A novice business owner from California called me the other day to discuss her staffing plans. While well-intentioned, the business owner excitedly conveyed her proposals for filling many key company positions with independent contractors. With beaming enthusiasm, the business owner gleefully informed me that independent contractors are not held to the same regulations on minimum wages, overtime, and record-keeping found in the Fair Labor Standards Act that apply exclusively to employees.

Her first rodeo. Not mine.

While acknowledging her fervor, I began to reveal the nuances of this often-attempted plan, to protect her company from myriad risk factors including unpaid wages and benefits as well as civil penalties. With each revealed nuance, I could feel her energy level inexorably subside to an uncomfortable place called “reality.”

Beyond historical laws and restrictions to this practice, I also informed her that the Department of Labor’s new 6-Factor Independent Contractor Test just took effect on March 11, 2024.

Opportunity for profit or loss depending on managerial skill
• The worker is likely an independent contractor if the worker: (a) determines or can meaningfully negotiate the charge or pay for the work provided; (b) accepts or declines jobs or chooses the order and/or time in which the jobs are performed; (c) engages in marketing, advertising, or other efforts to expand their business or secure more work; and (d) makes decisions to hire others, purchase materials and equipment, and/or rent space.
Investments by the worker and the employer
• The worker’s investments need not be equal to the employer’s investments and should not be compared only in terms of the dollar values or the sizes of the worker and the employer. Instead, the focus should compare the investments to determine if the worker is making similar types of investments as the employer (even if on a smaller scale) to suggest that the worker is operating independently, which would indicate independent contractor status.
Degree of permanence of the work relationship
• The worker is likely an employee when the work relationship is indefinite in duration, continuous, or exclusive of work for other employers. Conversely, the worker is likely an independent contractor when the work relationship is definite in duration, non-exclusive, project-based, or sporadic, based on the worker being in business for oneself and marketing his/her services to multiple entities.
Nature and degree of control
• A worker is likely an employee if the employer: sets the worker’s schedule; supervises the performance of the work; limits the worker’s ability to work for other employers; uses technological means to supervise work performance; reserves the right to discipline workers; places demands or restrictions that prevent the worker from working for others or working when they choose; or exerts control over prices or rates for services and the marketing of the services provided by the worker.
Extent to which the work performed is an integral part of the employer’s business
• The worker is likely an employee when the work performed is critical, necessary, or central to the employer’s business. This factor weighs in favor of the worker being an independent contractor when the work performed is not critical, necessary, or central to the employer’s business.
Skill and initiative
• This factor considers whether the worker uses specialized skills to perform the work and whether those skills contribute to a business-like initiative. This factor indicates employee status where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the employer to perform the work. It is the worker’s use of those specialized skills relating to a business-like initiative that indicates that the worker is an independent contractor.

Misclassification of “employees” as “independent contractors” is an ongoing source of litigation, replete with severe financial costs. Sage business owners will rely on this new 6-Factor test, verify that misclassification is included in their EPLI Wage and Hour Add-on Policy, and continue to conduct periodic audits using the SS-8 Form to ensure classification accuracy. Sage business owners have been to this rodeo before.

I wonder if that clown in the rodeo is an employee or an independent contractor?

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