Independent Contract UPDATES

The Department of Labor has updated the standards for who qualifies as an independent contractor, by codifying several factors that will be used in the determination. There are two core factors that carry the most weight when determining the status of the individual—the nature and degree of control that an employer has over the individual’s work, and the individual’s opportunity for profit or loss. There are three other factors that are described as less probative, and in some cases perhaps not probative at all, and are thus unlikely to outweigh the two core factors. The regulation does also allow for other factors that have not been listed to be considered in the process.

The nature and degree of the employer’s control over the work

Considered here is whether the worker can set his or her own schedule by project selection and/or the ability to work for others. If the employer is found to be controlling the individual’s schedule or workload and/or directly or indirectly requiring the individual to work exclusively for the potential employer, the worker will likely be found to be an employee.

This does not mean that the employer cannot exercise any control over an independent contractor. Without an individual being considered an employee, employers can require that an individual comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between businesses. If you have questions as to whether a requirement you want an individual to follow will affect their status as an independent contractor, please do not hesitate to reach out to us.

For example, let’s consider an owner and operate of a tractor-trailer. This individual works with a logistics company and performs transportation services. The owner-operator controls most aspects of his work, such as choosing his schedule by having the opportunity to accept which jobs to work. However, the logistics company installs, at its own expense, a device that limits the maximum speed of the owner-operator’s vehicle. While this is control exercised over the individual, this would not be control to the point that the individual would be considered an employee. As this is to ensure compliance to a law, this would not be considered control to the point of being an employer.

The individual’s opportunity for profit or loss

The individual’s opportunity for profit or loss is weighed toward whether he or she is an independent contractor. This means that the individual is assessed to see whether he or she has the opportunity to earn profits or incur losses based on his or her exercise of initiative, or based on management of investment in helpers, equipment, or material to further the work. Just because an individual does not have this opportunity does not necessarily mean that the individual is an employee. However, if an individual is unable to affect his or her earnings or is only able to do so by working more hours or faster, then this factor will weigh towards being an employee.

Let’s consider an individual who accepts assignments from a company that provides an app-based service that links people in need of repair work with those who perform repair work. While still accepting assignments from this company, the individual is able to increase her earnings by exercising initiative and business acumen by investing in her own equipment. The company has spent millions of dollars in developing and maintaining the app, marketing, maintaining security for information submitted, and monitoring customer satisfaction. Regardless of the fact that the company has invested more money in the business, the fact that the individual has meaningful opportunity for profit or loss through her initiative, investment, or both.

Let’s consider an individual who works for a construction company. As part of this individual’s work, he is paid a fixed hourly rate, and the company determines how many and which tasks he performs. Because the worker cannot affect how much he earns, does not have an opportunity to exercise initiative or manage investments, and does not get to determine what work he does, he will be considered an employee.

The other enumerated factors

The required skill(s) for the work is a secondary factor that can be considered. Here, it is considered whether the work at issue requires specialized training or a skill that the potential employer does not provide. If the work at issue requires no specialized training or skill, and/or the individual is dependent on the employer to equip him or her with any skills or training necessary to perform the job, then this factor will weigh in favor of the individual being an employee.

The permanence of the relationship between the individual and the potential employer. If the extent of the work relationship is intentionally definite in duration or sporadic, while still allowing for the possibility of regularly occurring fixed periods of work, this factor will weigh in favor of the individual being an independent contractor. If the extent of the work relationship is intentionally indefinite or continuous, then the factor will weigh in favor the individual being an employee. Seasonal work is not considered to be definite in duration or sporadic unless the individual can prove that the work does not resume automatically at the beginning of the new season.

The work as part of an integrated unit of production. If the work done by an individual is segregable from the potential employer’s process, then the factor leans toward an independent contractor. If the work is part of an integrated work process for a good or service, then the factor weighs in favor of the individual being an employee.

Other factors may be considered, but only if they are for the purpose of determining whether the individual is in business for him- or herself or is economically dependent on the potential employer for work.

It is also important to remember that actual practice is more important than what is contractually or theoretically possible. If the contract with an individual is structured to have them be an independent contractor, but the employer treats them like an employee, the individual will be found to be an employee.

As always, please do not hesitate to reach out to us at Irvine Legal if you have questions.