DOL Cracks Down on Using Contract Labor

The practice of many employers of using “contract labor” instead of employees to perform some jobs just got riskier as the Department of Labor (“DOL”) issued new guidance on who is an independent contractor. (Click here to read the DOL’s lengthy guidance).

The DOL concluded in an Administrator’s Interpretation issued July 15 that “most workers are employees under the Fair Labor Standards Act’s broad definitions”.

If most workers are employees, that means it is a high bar for any company to jump to prove that a person performing any work for the company is actually an independent contractor who will pay his own payroll taxes and will forego overtime, worker’s compensation, family and medical leave, health insurance under the Affordable Care Act and the other perks of being an employee.

If an employer is accused by the DOL of “misclassifying” a worker as contract labor, day labor, an independent contractor or any other euphemism for “I don’t want to pay taxes on this worker”, the company will have to satisfy an extremely liberal reading of the multi-factor “economic realities” test that the courts, IRS, and DOL use to judge whether a worker is actually an employee or is an independent contractor.

For starters, the DOL doesn’t care if the worker wants to be contract labor. The DOL also doesn’t care if the worker and the company agree, even in writing, that the relationship is not an employment relationship. “An agreement . . . is not relevant to the analysis of the worker’s status,” says the DOL’s interpretation.

The DOL believes that the most important question is whether the worker operates a “truly independent business”. Often, that means that the worker must serve other clients simultaneously with working for your company, the worker has his own business location, he has business cards, accounting software, he invoices you, he sets his own schedule, he bills by the project and he has a significant investment in his business.

But even those indications are not enough to make the contract laborer pass DOL muster. The DOL says that a compelling factor is whether the work the independent contractor is performing is “integral” to the company’s business. So isn’t a truck driver integral to the trucking company that is sending her cross-countries to make deliveries? Isn’t a realtor integral to her broker’s real estate company? Isn’t a newspaper delivery person integral to the paper she delivers? Isn’t a nurse integral to business of the nursing agency that contracts with the patient?

In the past, all of these workers were treated as independent contractors. We don’t know with any certainty the answers to these questions in the future, but I can promise that the DOL will be arguing that all of these workers are actually employees of the companies with whom they work.

The DOL doesn’t have final say in this matter. The courts will ultimately interpret the statutes, but that could take years. Meanwhile, the DOL has significant investigative powers and can show up at your business with little or no notice to audit your compensation practices. The DOL investigator will carefully inspect your 1099s and your payroll. If you have payments to contract labor or independent contractors on your books, expect intense scrutiny from the DOL investigator and the strong possibility of being required to make back wage payments and pay penalties long before you ever get to complain to a judge.

What should you be doing now to protect your business? Print out a list of everyone you issued a 1099 to in 2014 and take it to your employment lawyer for a long discussion of your risks of misclassifying these workers.

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