What Constitutes an Independent Contractor?

In mid-July, the Department of Labor set forth an Administrators Interpretation on the standard in the identification of employees who are misclassified as independent contractors. Essentially, this statement from the Department of Labor reinforces the redefinition of what a contract employee is (and is not). No longer does a contract agreement between an organization and an Independent Contractor or the (Contractors) Incorporation status define the relationship, instead the new standard is the level at which the Independent Contractor is economically dependent on the employer. This dependence is now determined through the application of the “Economic Realities Test”. The test considers several broad categories in the determination of the relationship between the two entities (whether employer/employee or employer/independent contractor). Consider these factors:

  1. What is the extent to which the employer/employee rely on one another for the business to run? If the entities are highly reliant on one another, the independent contractor status will be scrutinized.
  2. Does the worker have both opportunity for increased profit as well as risk of loss? An independent business owner is continually exposed to opportunities to profit and risk of loss based on productivity and efficiency.
  3. Does the independent contractor share in the investment/risk in the relationship? An independent business owner shares risk through investment in the business beyond any one project, whereas an employee shares little or no risk.
  4. Does the work performed require special skills and initiatives? A business owner has a special skill and takes the initiative to work with multiple entities to perform said skill.
  5. How permanent is the relationship? An independent business owner will avoid a permanent relationship with one employer but typically work project to project with multiple employers.
  6. How much control does the employer exercise over the contractor? An independent contractor generally works free from the control of the employer.

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