Clearing The Air: Part II, Independent Contractor Or Employee?
by Paul Ruden /
In last month’s column, I discussed the Internal Revenue Service’s test for identifying whether a worker is an employee or an independent contractor for purposes of the Internal Revenue Code. The essence of the IRS test is: which party has the right to, or in practice does, control the details of what and how the services are performed? The IRS determination controls the extent of the employer’s obligations to withhold various taxes and government charges from compensation.
The Department of Labor (DOL), which administers the Fair Labor Standards Act (FLSA), has a different approach, at least on the surface. The guiding principle is to determine, based on the “economic realities,” whether the worker is “economically dependent” on the employer or “in business for him or herself.” To make that determination, DOL looks at six factors:
1. the extent to which the work is an integral part of the employer’s business;
2. the worker’s opportunity for profit or loss depending on his managerial skill;
3. the extent of the relative investments of the employer and the worker;
4. whether the work performed requires special skills and initiative;
5. the permanence of the relationship; and
6. the degree of control exercised or retained by the employer.
DOL emphasizes that all of those factors must be considered in each case as a totality, relying on qualitative and not quantitative considerations. While no single factor is determinative, DOL clearly does not weigh the “control factor” as heavily as the others. The “overarching principle [is] that the FLSA should be liberally construed to provide broad coverage for workers.”
The recent interpretation of the law by the DOL Administrator can be found here.
The employee’s status drives the question of whether the employer is obligated to pay minimum wage and overtime compensation. Independent contractors, who by definition are in business for themselves, are outside the coverage of the FLSA.
This question is particularly important now that the DOL has decided to raise the threshold for payment of overtime, effective December 1, 2016, from $23,660 to $ 50,440. Since the average compensation of travel agents is in the neighborhood of $38,000, raising the threshold will mean that many more agents will be entitled to overtime pay, unless the structure of their compensation is changed.
The question is whether there is a substantive difference between the IRS standard, which focuses on control of the work details, and the DOL approach, which focuses on economic dependency. Lawyers can argue about such things forever. In practice, it is likely that both sets of criterial come down to the same question: is the worker in business for him or herself?
If so, the worker is almost certainly an independent contractor. If not, the worker is equally likely to be an employee in the eyes of the law, with the responsibilities I have discussed. Even if that conclusion is correct, a careful agency will evaluate all of the criteria for each working agent to be sure that the relationship passes muster regardless of which parts the government focuses on (you must also consider state laws wherever you engage workers), and by working agents who are not satisfied with the arrangement they currently have.
Travel agency owner/managers should understand that the 2015 “interpretation” by the DOL Administrator is just that—an interpretation. It is a statement of DOL’s views about what the law is, but it is not, in itself, the law. Again, this is the kind of metaphysical distinction that drives laymen crazy, and understandably so.
Moreover, a 2015 survey of labor lawyers revealed that most of them thought DOL’s interpretation was “nothing new” and merely summarized what they had understood the law to be all along. They are probably right. If so, agencies need to attend to these questions promptly, as the December 1 deadline for changes to the overtime pay thresholds is not likely to change.
In the next column, I will discuss some of the ways agencies can reduce their risks in managing independent-contractor relationships.
Read Part I