The government has long struggled to classify workers as employees or general contractors. Courts and even different branches of the federal government have used different standards and tests to determine this classification.
The default has traditionally been for workers to be employees. Employees are required to be paid overtime for working more than 40 hours in any one week. Employees of larger businesses also have certain legal rights to various insurance and paid leave benefits. Of course, taxes for the business and the worker are different depending upon whether the worker is an employee or not (typically, the practical tax question is whether the worker gets a 1099 with no withholding or a W2 with various mandatory withholdings).
Last week, the Department of Labor set forth a new standard rule for distinguishing between employees and independent contractors, which rule is intended to provide consistency and simplicity in distinguishing between the two categories of work and eliminate a presumption of “employee” classification. This new rule does not supersede state laws that may treat people who would otherwise be independent contractors as if those people are employees for purposes of providing certain state-mandated benefits.
The new rule is not easy to apply, but it is certainly easier than the inconsistent and very subjective traditional standards.
The new rule provides two primary considerations and three secondary considerations to distinguish the worker’s classification as an employee or independent contractor. The primary considerations are intended to be almost definitive in the determination, with the three secondary considerations serving as additional support if there is no clear conclusion after analyzing the two primary considerations.
First, if the worker has control over the worker’s hours and has discretion in taking certain tasks (i.e. driving trips for Uber), the worker is more likely to be an independent contractor. However, having some mandatory times when work must be completed is not determinative alone.
Second, if the worker’s only way to earn more money is to work more hours or use the business’s resources to be more efficient, the worker is more likely to be an employee. Otherwise stated, if a worker has the freedom to find ways for the worker to be more efficient with the worker’s own resources (and thus increase the worker’s net income), the worker is more likely to be an independent contractor.
The secondary considerations that apply to clarify the primary considerations start with determining whether the worker provides a skill or experience that the business does not already have. If so, the worker’s classification leans toward being an independent contractor.
Next, if the worker has an almost consistent, permanent-like working relationship with the employer, that fact would lean toward the worker being an employee.
Finally, if the worker undertakes the business’s core service on a regular basis, the worker is more likely to be an employee. For example, if a painting business is owned by an administrator who simply hires a handful of painters to do the work that the business secures, the painters are more likely to be employees.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.