Increased governmental scrutiny of independent contractor relationships is a substantial concern for employers who use independent contractors in the work force.
Under President Obama’s fiscal year 2012 budget proposal, the United States Department of Labor would receive $46 million for initiatives with other agencies to fund state grants to address worker misclassification.
The Department believes that there is widespread misclassification of employees as independent contractors. The budget evidences the department’s intention to scrutinize the relationship between an employer and an independent contractor closely.
Secretary of Labor Hilda Solis said that the initiative “will help level the playing field for employers who abide by the law and provide employees with their rightful pay and benefits.” Missouri Lawyers Weekly, Vol. 15, # 12 (March 21, 2011).
A determination that workers who are classified as independent contractors are nevertheless actually employees could result in monetary sanctions. For example, the employer may not have paid the worker the required minimum wage of $7.25 an hour. In addition, the worker could be entitled to overtime compensation for the time that he or she worked in excess of 40 hours in a particular work week.
The Department of Labor applies the economic reality test to determine whether a worker is an independent contractor. The economic reality test employs the following factors:
- The extent to which the services rendered are an integral part of the employer’s business.
- The permanency of the relationship between the employer and the worker.
- The amount of the worker’s investment in facilities and equipment.
- The nature and degree of control asserted over the worker.
- The worker’s opportunity for profit and loss.
- The amount of initiative, judgment, or foresight in open market competition with others required for the worker’s success.
- The degree of independent business organization and operation.
Department of Labor Wage & Hour Division’s Fact Sheet # 13.
Certain factors are immaterial to the Department of Labor’s analysis of independent contractor status. Those include the place where the work is performed, the absence or presence of a formal employment agreement, and whether an alleged independent contractor is licensed by a state or local government.
Complicating the situation, Missouri uses factors different from those that the federal government uses to determine whether a worker is an independent contractor or an employee.
If an employer misclassifies a worker as an independent contractor, the Missouri Labor & Industrial Relations Commission may determine that the employer owes the state contributions for unemployment compensation. Furthermore, if the employer has no workers’ compensation insurance policy, it could also impose criminal penalties.
Springfield-area employers have been audited by both the Missouri Labor & Industrial Relations Commission and the United States Department of Labor and, as a result, in some circumstances have received multiple assessments for minimum wage and overtime compensation, unemployment contributions and penalties, and workers’ compensation penalties.
Employers would be wise to have their legal counsel evaluate their independent contractor relationships and advise them whether it appears that workers are truly independent contractors or should instead be classified as employees.