The Department of Labor this week issued new guidance on how companies should distinguish between employees and independent contractors. 

The 15-page memo, issued July 15, sets forth the test the Labor Department will use to enforce its wage and hour laws against companies that wrongly classify employees as independent contractors. “Misclassification of employees as independent contractors is found in an increasing number of workplaces in the United States, in part reflecting larger restructuring of business organizations,” the Labor Department stated.

Richard Reibstein, a partner in the labor and employment practice group at law firm Pepper Hamilton, wrote in a client alert that the guidance “contains nothing new, different, or dramatic. In fact, the new interpretation does little more than restate the same six factors that have historically been applied by the Labor Department and that can still be found on its website,” he wrote.

“The main difference between the new Interpretation and the Labor Department’s prior enforcement policy is a greater emphasis on the ‘economic dependence’ of the workers on the business that has engaged their services,” Reibstein added.

For example, the first “factor” in the revised guidance, similar to the Labor Department’s 2014 Fact Sheet, is whether the work is an "integral part of the employer’s business." As such, the guidance reiterates the Labor Department’s previous interpretation: “If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer.” The first factor has been amended slightly, however, to state that, “a true independent contractor’s work, on the other hand, is unlikely to be integral to the employer’s business.”

“Courts may well take issue with this add-on,” Reibstein wrote. Many companies retain a small firm with a few employees to perform work that is “integral to its business, yet few would argue that the small business is anything other than an independent contractor,” he added. “Should the result be any different if the small business is a one-person shop? Evidently, the Labor Department believes it should be.”

The guidance stressed that each factor should not be analyzed in a vacuum. “Instead, each factor should be considered in light of the ultimate determination of whether the worker is really in business for him or herself (and, thus, is an independent contractor), or is economically dependent on the employer (and, thus, is its employee).”

Proactive Measures

Michael Droke, a partner at law firm Dorsey and Whitney, offers the following practical compliance considerations for companies on how to respond to the Labor Department’s guidance:

Assign responsibility. “[M]any companies do not monitor their independent contractor relationships,” Droke says. “Companies should make clear which department within the organization is responsible to understand the law, know which contractors have been engaged, and monitor compliance. Often, the human resources or finance department is put in charge.” 

Monitor accordingly. “General counsel should question independent contractor classification as part of their global risk audit and take appropriate action to ensure that the situation is being monitored,” advises Droke. 

Maintain written records. “Employers should maintain basic records on the independent contractor determination process and the facts used to make that determination,” Droke says. Examples of records they should keep include records of business licenses, business cards, contractor tax records, project work plans showing limited engagements, and correspondence from the contractor, he says. 

Limit contractor engagement. “Contractors should not have internal e-mail accounts, should not be given server access, and should not be invited to employee functions,” Droke says. 

Conduct periodic audits. Periodically audit existing contractors to ensure they haven’t inadvertently changed from being contractors to employees. “If an otherwise valid contractor arrangement becomes economically dependent on the work, then the relationship may convert to an employee entitled to overtime,” Droke says. “This audit should be conducted with legal counsel in order to obtain confidential advice on the standards and contractor determination.”  

Reibstein wrote, “From a practical standpoint, the new Interpretation signals a renewed emphasis by the Labor Department on cracking down on companies that it believes are misclassifying employees as independent contractors.”

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