Loss of Control with Independent Contractors

The U.S. Department of Labor (DOL) and California’s Division of Labor Standards Enforcement (DLSE) are now focused on raising the bar for independent contractors (I/Cs). It’s time to stop following so-called industry standards and think for yourself on whether or not you are compliant with your I/Cs.

In the past, much was made of whether or not you “controlled” the work of the I/C. Control has now dropped much lower on the list and the DOL and DLSE will be looking instead at the “economic realities.” This isn’t an easy test because it’s not just a checklist. The DOL is looking at a qualitative analysis of 6 factors that don’t provide you with practical and objective criteria… but when have they ever provided easy criteria? Here are the factors:

• What amount of the I/Cs work product is an integral part of your business? (Hint: it shouldn’t be.)
• What level of risk does the I/C have regarding profit or loss based on his/her skill? (Hint: they should have a huge risk.)
• What level of “investment” in the work do you and the I/C have? (Hint: the I/C should have more invested.)
• Does the work the I/C performs require special skills and initiative? (Hint: they should be bringing something to the table your employees don’t have.)
• How “permanent” is the relationship between you and the I/C? (Hint: an I/C should be project-focused or providing a service you don’t have internally.)
• How much control do you have over the I/C or his/her work? (Hint: you should only control the deadline and scope of work.)

I’ve mentioned before that an I/C should have additional clients and receive no more than 80% of their income from you and this new direction from the DOL hasn’t changed my mind. Here are a few insights from Matthew Disbrow (an attorney with Honigman in Detroit) and Michael Droke (an attorney with Dorsey and Whitney in Palo Alto) that may help protect you:

• Use I/Cs sparingly because the DOL thinks most work should be done by employees.
• Using an I/C agreement or even hiring a person who has a business name/entity won’t protect you if they don’t pass the economic realities test.
• Before hiring an I/C, give careful consideration about the type of work and scope of the project to ensure an I/C is the appropriate choice.
• Be sure your I/C is set up with appropriate insurance(s) to protect you from wage and hours claims related to any workers the I/C may be using.
• Avoid contrary actions… don’t give an I/C a company email address, access to your server, or invite them to employee events.
• Periodically review your I/Cs to ensure they still qualify as an I/C.
• Keep records on how you determined someone was qualified as an I/C so you can prove you did your due diligence.

The DOL and DLSE are busy trying to reduce the number of people who are misclassified as independent contractors. So… shouldn’t you get busy making sure your I/Cs are properly classified?