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Independent Contractor vs Employee

On July 15th, the U.S. Department of Labor’s Wage and Hour Division issued new guidelines for classification of employees versus independent contractors.  The administrator’s interpretation labeled the 15-page article as “SUBJECT: The Application of the Fair Labor Standards Act’s “Suffer or Permit” Standard in the Identification of Employees Who Are Misclassified as Independent Contractors.”  Stating that according to the FLSA employers frequently misclassify their workers.

The push to reclassify and curtail the misclassification of independent contractors vs employees came from the Department of Labor’s Wage and Hour Division (WHD). The WHD receives complaints on a regular basis from workers alleging misclassification. WHD in conjunction with the IRS they have laid out a more extensive definition of employee.

My previous understanding of what an independent contractor (IC) is, goes a little something like this:

  • An IC is not an employee and therefore, receives no benefits.
  • An IC cannot be required to keep a certain schedule.
  • An IC will use all their own equipment and supplies.
  • An IC is paid as 1099-MISC income, no taxes are withheld.
  • An IC cannot be hired or fired, only be offered work in exchange for pay.

Labor laws can be difficult, at best, to understand at times. When you are a small business and you are your own HR department there is a lot to learn. It can be overwhelming, to say the least.

So before I go into the further, boring but necessary details of the new labor law updates, let me share with you a little story. We once in the past made the mistake of misclassifying one of our part-time workers.

First of all, we are in Texas so we have fairly lenient labor laws, the story here would have never happened in California, since the labor laws are more clear or strict depending on how you look at it.

So a few years back we hit a bit of a busy season and needed some part-time help keeping up with the little things, like keep our cars clean, stocked and ready to go.  So we hired a guy to work part-time as needed to help us out.  We essential offered him a flat rate to complete a number of tasks on a weekly basis.  The total amount of work completed per week was less than 20 hours a week, and he was able to set his own schedule within reason.

This worked out fine until business slowed down and we no longer needed an extra hand. Even though he was not considered an employee by our standards, he listed as an employer a year later when he filed for unemployment.

When we first received the notice, we were almost in shock thinking how on earth can he file for unemployment with us when he was never an employee. We considered him a contractor.  So that’s what we stuck with.  We filed the paperwork to contest the claim for unemployment, and we lost.

It was a battle of he said she said, and these are the main points that I believe led to us losing the battle.  We may have made a few mistakes…

  • He was a friend of a friend, so we trusted him, and didn’t make him fill out a contractor agreement.
  • As a flat rate contractor, we did not track his actual hours, we had a verbal agreement that he would work on the projects and complete them in a timely fashion.  We expected him to work less than 20 hours a week.
  • He worked at our location, and we provided the necessary supplies (a contractor no-no).

So as you can see our first mistake was a lack of paperwork, our second mistake was a lack of paperwork, and our third mistake was that we let him use our supplies.  There may have been other factors that led us to lose the battle, but regardless it was a wake-up call.

Without going on and on about the factors that are set forth in the new document, I will just say that paperwork is a necessary evil.

To summarize the basis for classification of contractor vs employee is set forth here:

  1. Is the Work an Integral Part of the Employer’s Business?
  2. Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?
  3. How Does the Worker’s Relative Investment Compare to the Employer’s Investment?
  4. Does the Work Performed Require Special Skill and Initiative?
  5. Is the Relationship between the Worker and the Employer Permanent or Indefinite?
  6. What is the Nature and Degree of the Employer’s Control?

Looking back on the situation I would have still classified him as an independent contractor, however, I would have taken care to have the proper documentation on file.

Do you use independent contractors, if so do the new classification rules change anything for you?