Are You Hiring an Independent Contractor or an Employee?
The debate on how to distinguish an independent contractor from an employee continues. The U.S. Department of Labor (“DOL”) recently issued its latest interpretation under the Fair Labor Standards Act (“FLSA”) aiming to provide clarity for workers and employers. The DOL Independent Contractor Rule does provide some clarity by outlining six factors for employers to consider. However, the new Rule does not entirely answer the question: Are you Hiring an Employee or an Independent Contractor? Below are three steps employers should take to fully answer the question:
- In what state does the employee or independent contractor work?
- Does the state have its own test under state labor laws?
- Will the analysis under the state approach provide a different result from the federal approach?
The new DOL Rule does not change state labor laws. Some states, such as New Jersey, California, and Illinois, have different tests for determining whether an independent contractor has been misclassified under the state’s labor laws. Employers are expected to comply with all federal, state, and local labor laws, and the state in which the employee or independent contractor works will generally control. In particular, this distinction may arise when dealing with remote workers.
Certain states use a different test from the DOL’s “economic reality” analysis. For instance, if the worker is located in California, New Jersey, Massachusetts, or Illinois, employers must comply with the “ABC test” as well. Employers should not assume that meeting the requirements to classify a worker as an independent contractor under the federal test means that the requirements are met under the state test. Employers are advised to consider both federal, state, and even local requirements, if applicable.
There are likely to be instances where the DOL’s Rule will produce a result that differs from the result produced by the state’s test. The DOL Rule draws its conclusion based on the totality of the circumstances, focusing on whether the worker is economically dependent on the employer for work. For workers in California, the analysis is more rigid. An employer may not classify a worker as an independent contractor unless three specific conditions are met, none of which directly focus on the economic reality of the worker. For California and other states that follow the ABC test, the likelihood that the worker would be properly classified as an independent contractor under the DOL Rule yet misclassified under the state’s rule is high.
Employers who utilize independent contractors are advised to review those contracts for compliance with the new federal Rule. Given the distinction between the DOL’s analysis and the analysis under state rules, employers may find their independent contractors are misclassified. Misclassification can result in exposure to liability for unpaid wages, overtime, and other violations of the FLSA.