Department of Labor Guidance Narrows the Definition of Independent Contractor

Earlier this summer, the DOL issued further guidance regarding the misclassification of employees as independent contractors.  The DOL states that improperly classified employees do not “receive important workplace protections such as the minimum wage, overtime compensation, unemployment insurance, and workers’ compensation” and that misclassification “results in lower tax revenues for government.”

The new guidance focuses on the multi-factorial “economic reality” test. Those factors include: (1) the degree of control exercised by the employer over the worker; (2) the worker’s opportunity for profit or loss depending upon managerial skills; (3) the alleged worker’s investment in equipment or material required for the tasks or the employment of helpers; (4) whether the service rendered requires special skills; (5) the degree of permanence of the working relationship; and (6) the extent to which the work is an integral part of the employer’s business.

According to the DOL: “[u]ltimately, the goal of the economic realities test is to determine whether a worker is economically dependent on the employer (and is therefore an employee) or is really in business for him or herself (and is therefore an independent contractor).

Employers should take this time to review their independent contractor relationships to determine if they meet the economic reality test.  Employers should note that there are significant penalties in place for misclassification and that the DOL is closely scrutinizing independent contractor relationships.

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