Uber, the “not a taxi service” startup, has been making headlines since it’s inception. It’s making headlines again; this time because of a class action lawsuit from its California drivers. Uber claimed the drivers are “not employees,” but a federal judge in California ruled they are.
How and why did this happen? Could it happen to your business?
Heather Kennedy, a human resources professional with over 20 years of experience and owner of Sparq Coaching and Consulting, an independent consulting business, recently spoke with IB to answer those questions and more.
IB: In July 2015, Department of Labor Administrator David Weil issued an Administrator’s Interpretation that narrowed its definition of who can qualify as an independent contractor and who should be classified as an employee. Why did the Department of Labor (DOL) issue this new guidance?
Kennedy: Companies that properly classify their employees can be at a competitive disadvantage compared to companies misclassifying employees as independent contractors. Independent contractors do not have the same employment protections as employees, especially in regard to minimum wage, overtime, worker’s compensation, unemployment, and benefits from the employer. Misclassification as an independent contractor also results in lower tax revenue for both federal and state governments. The intent of the new interpretation is to clarify what distinguishes an employee from an independent contractor.
IB: What is the impact of the revised DOL definition?
Kennedy: Disputes of independent contractor or employee status are one of the most common complaints received and investigated by the DOL Wage and Hour Division (WHD). Last year alone, the WHD recovered over $79 million in back wages for more than 109,000 employees. While an administrative interpretation does not carry the same force as a statute or regulation, the interpretations are used as guidance when cases are brought before the courts. A narrowing of the interpretation means that companies that use independent contractors (or classify part of their workers as independent contractors) will need to review their status to ensure they are appropriately classifying employees and independent contractors.
(Continued)
IB: What distinguishes an independent contractor from an employee?
Kennedy: The interpretation includes a six factor economic realities test that employers should consider when determining whether to classify someone as an employee or independent contractor. The factors are intended to help employers determine the degree to which someone performing work for them is economically independent from the employer. The table below lists each factor and examples drawn from the Administrative Interpretation of how it may be applied to support independent contractor status or employee status. One important thing to remember is that no one factor is determinant in classifying someone as an independent contractor or employee. All have to be considered in relation to the work being performed.
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Factor
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Possibly Employee
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Possibly Independent Contractor
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1) Is the work an integral part of the employer’s business?
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For a construction company that frames residential homes, carpenters are integral to the employer’s business because the company is in business to frame homes, and carpentry is an integral part of providing that service.
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In contrast, the same construction company may contract with a software developer to create software that, among other things, assists the company in tracking its bids, scheduling projects and crews, and tracking material orders. The software developer is performing work that is not integral to the construction company’s business, which is indicative of an independent contractor.
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2) Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
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A worker provides cleaning services for corporate clients. The worker performs assignments only as determined by a cleaning company; he does not independently schedule assignments, solicit additional work from other clients, advertise his services, or endeavor to reduce costs.
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In contrast, a worker provides cleaning services for corporate clients, produces advertising, negotiates contracts, decides which jobs to perform and when to perform them, decides to hire helpers to assist with the work, and recruits new clients.
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3) How does the worker’s relative investment compare to the employer’s investment?
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A cleaning company provides insurance, a vehicle to use, and all equipment and supplies for the worker. The company invests in advertising and finding clients. A worker providing cleaning services for the company occasionally brings her own preferred cleaning supplies to certain jobs. In this scenario, the relative investment of the worker as compared to the employer’s investment is indicative of an employment relationship between the worker and the cleaning company.
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A worker providing cleaning services receives referrals and sometimes works for a local cleaning company. The worker invests in a vehicle that is not suitable for personal use and uses it to travel to various worksites. The worker rents her own space to store the vehicle and materials. The worker also advertises and markets her services and hires a helper for larger jobs. She regularly purchases material and equipment to provide cleaning services and brings her own equipment and cleaning supplies to each worksite. Her level of investments is similar to the investments of the local cleaning company for whom she sometimes works. These types of investments may be indicative of an independent contractor.
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4) Does the work performed require special skill or initiative?
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A highly skilled carpenter provides carpentry services for a construction firm; however, such skills are not exercised in an independent manner. For example, the carpenter does not make any independent judgments at the job site beyond the work that he is doing for that job; he does not determine the sequence of work, order additional materials, or think about bidding the next job, but rather is told what work to perform where. In this scenario, the carpenter, although highly skilled technically, is not demonstrating the skill and initiative of an independent contractor (such as managerial and business skills). He is simply providing his skilled labor
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In contrast, a highly skilled carpenter who provides a specialized service for a variety of area construction companies, for example, custom, handcrafted cabinets that are made-to-order, may be demonstrating the skill and initiative of an independent contractor if the carpenter markets his services, determines when to order materials and the quantity of materials to order, and determines which orders to fill.
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5) Is the relationship between the worker and the employer permanent or indefinite?
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An editor has worked for an established publishing house for several years. Her edits are completed in accordance with the publishing house’s specifications, using its software. She only edits books provided by the publishing house. This scenario indicates permanence to the relationship between the editor and the publishing house that is indicative of an employment relationship.
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Another editor has worked intermittently with 15 different publishing houses over the past several years. She markets her services to numerous publishing houses. She negotiates rates for each editing job and turns down work for any reason, including because she is too busy with other editing jobs. This lack of permanence with one publishing house is indicative of an independent contractor relationship.
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6) What is the nature and degree of the employer’s control?
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A registered nurse who provides skilled nursing care in nursing homes is listed with a registry company in order to be matched with clients. The registry interviewed the nurse prior to her joining the registry, and also required the nurse to undergo a multi-day training presented by the company. The company sends the nurse a listing each week with potential clients and requires the nurse to fill out a form with them prior to contacting any clients. The company also requires that the nurse adhere to a certain wage range and the nurse cannot provide care during any weekend hours. The nurse must inform the company if she is hired by a client and must contact them if she will miss scheduled work with any client. In this scenario, the degree of control exercised by the registry is indicative of an employment relationship.
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Another registered nurse who provides skilled nursing care in nursing homes is listed with a registry company in order to be matched with clients. The registry sends the nurse a listing each week with potential clients. The nurse is free to call as many or as few potential clients as she wishes and to work for as many or as few as she wishes; the nurse also negotiates her own wage rate and schedule with the client. In this scenario, the degree of control exercised by the registry is not indicative of an employment relationship.
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Disclaimers:
- This is not intended to be legal advice. Heather Kennedy is not an attorney. Please consult your attorney to discuss concerns and classifications specific to your business.
- While independent contractor status can often be beneficial for both the employer and the contractor, it is not enough to classify someone as an independent contractor.
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(Continued)
IB: Are there any other tips that you would offer employers?
Kennedy: Yes. If you are considering using independent contractors, make sure:
- They have other clients or are actively pursuing other clients.
- They are negotiating contracts, investing in the growth of their own company (advertising, website, etc.), and have control over most of the conditions of employment — including taking or refusing work from you.
- Your contracting agreements have clear scope of work and duration. If the job is large, has a long duration, or appears full time, the contractor should ensure she or he is taking time to manage his or her business and not working for you full time.
- They provide their own equipment. If they must use your equipment, make sure the reasons are spelled out in the agreement.
Finally, here is a helpful infographic shared by the U.S. Department of Labor on its Facebook page.
Sparq Coaching and Consulting focuses on helping individuals, teams, and organizations navigate the people side of change and keep work a place people want to be. Heather Kennedy holds a master’s degree in Organizational Psychology and maintains both an SPHR and SHRM-SCP designation.
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