The 6 Tell-Tale Signs That Someone is an Employee and Not a Contractor

By Eric B. Meyer

In my younger days, I had a summer job in college where I clocked in at 9 and left at 5. They gave me a desk, a computer, training, a supervisor, job instruction, and a not-so-fat paycheck.

But, at least, nothing got withheld from my paycheck.

They called me an independent contractor and gave me a 1099.

Yeah, about that…

Misclassification creates problems for employees

The U.S. Department of Labor would not approve of the Meyer summer job situation.

Indeed, in a memo released yesterday, a Labor Department administrator expressed concern that the misclassification of employees as independent contractors is on the rise in the U.S.

Why is this a problem? Many independent contractor are, in fact, non-exempt employees. Non-exempt employees are guaranteed minimum wage and overtime for working over 40 hours in a week. Independent contractors receive no such guarantees.

Employee or independent contractor?

Certainly, it’s not the label that a business slaps on the worker. Actually, the thing about independent contractors — taking a broad view — is that they are economically independent (i.e., they are in business for themselves). Or, put a different way, a worker who is economically dependent on an employer is suffered or permitted to work by the employer.

That, my friends, is an employee.

Getting more granular, the Department of Labor guidance lists six (6) factors, which it says reflect the “economic realities” of when the worker is an employee or an independent contractor:

Is the work an integral part of the employer’s business?
Does the worker lack managerial skills to impact the opportunity for profit or loss?
Does the worker lack “skin” (an opportunity for profit or loss) in the business relationship?
Does the worker robotically follow orders (as opposed to exercising independent thought, judgment, and initiative)?
Is the relationship between the worker and the employer permanent or indefinite?
Does the business exercise a lot of control over the worker?

According to the Labor Department memo, no one factor controls. However, each “yes” to the six questions above increases the chances that you’ve got an employee and not an independent contractor. Indeed, the memo concludes that most workers are employees under the FLSA’s broad definitions.

Employers, here’s your wake-up call

Yes, 2016 is gonna be the year of the Fair Labor Standards Act.

I’m telling you right now: Sell your pork belly and grapefruit futures and buy some FLSA options. Between the Labor Department’s spotlight on misclassification and the new proposed overtime rules, there’s gonna be some awfully low-hanging wage-and-hour fruit for employees and their lawyers to grab onto. Class actions? Absolutely.

So, you have two choices: Start preparing now with an audit of your pay practices to weed out and correct FLSA-compliance issues. Or, do nothing, cross your fingers, and clutch your pearls. But, if you get nailed, you’ll be on the hook for backpay of up to three years, liquidated damages equalling 100 percent of the back pay, and attorney’s fees, plus your own fees.

Folks, this is that “ounce of prevention is worth a pound of cure” situation.

Otherwise, I told you so.

This was originally published on Eric B. Meyer’s blog, The Employer Handbook.