This memorandum is not intended to provide specific advice about individual legal, business or other questions.\u00a0 It was prepared solely as a guide, and is not a recommendation that a particular course of action be followed.\u00a0 If specific legal or other expert advice is required or desired, the services of an appropriate, competent professional should be sought.<\/p>\n
PREPARED BY BIG I OFFICE OF THE GENERAL COUNSEL<\/strong><\/b><\/p>\n Updated as of October 2019<\/p>\n A\u00a0number\u00a0of\u00a0actions\u00a0by\u00a0the\u00a0U.S.\u00a0Department\u00a0of\u00a0Labor\u00a0(\u201cDOL\u201d)\u00a0during\u00a0President\u00a0Obama\u2019s administration, including an Administrator\u2019s Interpretation (\u201cAI\u201d) issued in July 2015, spurred many businesses to reevaluate how they classify their workers, either as an employee or independent contractor. In June 2017, however, the DOL withdrew the AI, in which the DOL took the position that few workers can properly be classified as independent contractors. Nevertheless, the DOL emphasized that it will continue to enforce all laws and that the withdrawal does not change businesses\u2019 responsibilities under the Fair Labor Standards Act, which governs federal minimum wage and overtime requirements.\u00a0Notably, the Administrator\u2019s Interpretation \u2013 or a variation thereof \u2013 could be brought back at any time by the current or a future Administration.<\/p>\n This memorandum focuses on the issue of whether a worker should be classified as an employee or independent contractor.<\/p>\n Courts and administrative agencies have traditionally used one of three tests for determining whether a worker should be classified as an employee or independent contractor:<\/p>\n o\u00a0The IRS uses its own control test for federal tax purposes, and that test takes into account elements from all three tests.<\/p>\n Although the common law control test is typically the most straightforward, all three tests require fic inquiry of the business and worker at issue.<\/p>\n The common law control test states that a worker is an employee, and not an independent contractor, if the business has the right to control the means by which the worker performs his services. Absent the right to control the means by which the worker performs his services, a business can properly classify the worker as an independent contractor. Importantly, the right to control the means, not the actual exercise of that control, is determinative. For example, an outside website designer or marketing firm engaged by an insurance agency would likely be properly classified as an independent contractor if the agent lacks the right to control, and does not control, the means by which the designer or marketing firm provides its services. However, it is acceptable under the common law control test for the business to control the ends to be accomplished\u2014e.g.<\/em>, the development of a website and the creation of marketing materials.<\/p>\n For federal tax purposes, the IRS uses an expanded version of the control test, under which it considers three categories: (1) behavioral control; (2) financial control; and (3) the relationship of the parties.<\/p>\n The behavioral control category is closest to the common law control test. The IRS looks at the business\u2019 right to control the manner in which a worker performs services. The IRS considers, among other things, whether the business provided the worker with instructions or training concerning the means or methods of performing the requested services. The IRS refers to \u201cperiodic or on-going training by a business about procedures to be followed and methods to be used\u201d as \u201cstrong evidence of an employer-employee relationship.\u201d If the business either controls or retains the right to control the manner in which a worker performs services, that factor weighs in favor of a finding of employee status.<\/p>\n Under the financial control category, the IRS identifies several factors for evaluating whether a business has the right to direct or control the economic aspects of the worker\u2019s activities. These factors include:<\/p>\n (1)\u00a0\u00a0\u00a0\u00a0whether the worker has made a significant investment. The IRS recognizes, however, that some types of work do not require large expenditures and that a significant investment is not necessary for independent contractor\u00a0status;<\/p>\n (2)\u00a0\u00a0\u00a0\u00a0unreimbursed expenses, which are more common among independent contractors. The IRS advises not to focus on reimbursed expenses, which independent contractors may negotiate and contract to\u00a0receive;<\/p>\n (3)\u00a0\u00a0\u00a0\u00a0whether\u00a0the\u00a0work\u00a0provides\u00a0services\u00a0to\u00a0other\u00a0clients\u00a0in\u00a0the\u00a0relevant\u00a0market,\u00a0which\u00a0favors a\u00a0finding of independent contractor status, but the\u00a0absence\u00a0of which is\u00a0neutral;<\/p>\n (4)\u00a0\u00a0\u00a0\u00a0the method for calculating the payment owed to the worker, with a flat fee being most indicative of independent contractor status;\u00a0and<\/p>\n (5) opportunity for profit or loss, which considers the foregoing factors, as well as whether the worker is free to make business decisions that affect the worker\u2019s profit or loss.<\/p>\n Significantly, unlike the economic realities test used by the DOL (see Section III of this memorandum), the IRS emphasizes as part of the financial control category\u00a0that a worker\u2019s economic dependence on or economic independence from the business is \u201cinappropriate for use in analyzing worker status.\u201d<\/p>\n Finally, the IRS looks at how the worker and business perceive their relationship.\u00a0 The IRS views the parties\u2019 actions as reflecting on their intent concerning control, and it looks at the following factors:<\/p>\n (1)\u00a0\u00a0\u00a0the expressed intent of the parties, such as through a written contract or use of a 1099 or\u00a0W-2;<\/p>\n (2)\u00a0\u00a0\u00a0\u00a0whether\u00a0the\u00a0worker\u00a0has\u00a0created\u00a0her\u00a0own\u00a0business\u00a0entity\u00a0through\u00a0which\u00a0she\u00a0provides services,\u00a0which\u00a0is\u00a0indicative\u00a0of\u00a0independent\u00a0contractor\u00a0status,\u00a0particularly\u00a0when corporate\u00a0formalities are followed;<\/p>\n (3)\u00a0\u00a0\u00a0\u00a0whether\u00a0the\u00a0worker\u00a0received\u00a0benefits\u00a0traditionally\u00a0associated\u00a0with\u00a0employee\u00a0status\u2014<\/p>\n e.g.<\/em>, paid vacation, paid sick days, and insurance;<\/p>\n (4)\u00a0\u00a0\u00a0\u00a0the\u00a0length\u00a0of\u00a0the\u00a0relationship,\u00a0with\u00a0an\u00a0indefinite\u00a0relationship\u00a0indicative\u00a0of\u00a0employee status\u00a0and\u00a0a\u00a0long-term\u00a0relationship,\u00a0absent\u00a0more,\u00a0indicative\u00a0of\u00a0neither\u00a0employee\u00a0nor independent contractor status; and<\/p>\n (5)\u00a0\u00a0\u00a0\u00a0whether\u00a0the\u00a0worker\u2019s\u00a0services\u00a0are\u00a0a\u00a0key\u00a0aspect\u00a0of\u00a0the\u00a0regular\u00a0business\u00a0activity\u00a0of\u00a0the company.\u00a0If\u00a0the\u00a0worker\u2019s\u00a0services\u00a0are\u00a0a\u00a0key\u00a0aspect,\u00a0the\u00a0IRS\u00a0considers\u00a0whether\u00a0the business\u00a0has\u00a0the\u00a0right\u00a0to\u00a0direct\u00a0or\u00a0control\u00a0the\u00a0means\u00a0or\u00a0methods\u00a0of\u00a0the\u00a0worker\u2019s performance.<\/p>\n Notably, the IRS states that factors including whether the worker is engaged on a part-time or full- time basis, where the worker performs the services, and the hours of work provide less useful evidence of whether a worker is an independent contractor or an employee.<\/p>\n The so-called ABC test, which is used by approximately half of the states to determine worker status pursuant to state\u00a0unemployment insurance laws, provides\u00a0a worker is an independent contractor if: (1) there is a near total\u00a0A<\/u><\/strong><\/b>bsence of control, both by contract and in fact; (2) the\u00a0B<\/u><\/strong><\/b>usiness\u00a0 is\u00a0 outside\u00a0the usual\u00a0 course\u00a0 of\u00a0the\u00a0workplace\u2019s\u00a0business or performed away from workplace\u2019s offices; and (3) the work is\u00a0C<\/u><\/strong><\/b>ustomarily done by independent contractors. This test is generally viewed as leading to more findings of employee status than are found under the common law control test.<\/p>\n Finally, some courts apply an \u201ceconomic realities\u201d test that looks first at whether the business has the right to control how the work is performed, and then considers factors such as the extent to which the worker\u2019s services are an integral part of the business, the worker\u2019s investment in her own business, and the worker\u2019s opportunity for profit or loss. Courts have applied this test mostly in cases involving laws, such as the federal Fair Labor Standards Act (\u201cFLSA\u201d) and the Family and Medical Leave Act that define employee more broadly than it is defined under the common law.<\/p>\n III.\u00a0CONSIDERATIONS FOR INDEPENDENT INSURANCE AGENCIES<\/u><\/strong><\/b><\/p>\n During the Obama Administration, the DOL consistently listed worker misclassification as an enforcement priority. The DOL entered partnerships with 31 states to work on joint investigations and enforcements of the FLSA and other employment laws. Several states expanded their investigatory and enforcement efforts, particularly in low-wage fields. The federal and state efforts have been predicated in large part on the belief that many businesses skirt the FLSA and other employment laws for their own financial benefit\u2014e.g.<\/em>, to avoid taxes\u2014and to the detriment of their workers, who do not receive minimum wage, overtime, family leave, and other protections afforded to employees. Under President Trump, however, the DOL appears to have de-prioritized investigations into potential worker misclassification matters.<\/p>\n","protected":false},"excerpt":{"rendered":" This memorandum is not intended to provide specific advice about individual legal, business or other questions.\u00a0 It was prepared solely as a guide, and is not a recommendation that a particular course of action be followed.\u00a0 If specific legal or other expert advice is required or desired, the services of an appropriate, competent professional should … Continue reading “WORKER CLASSIFICATION: EMPLOYEE vs. INDEPENDENT CONTRACTOR”<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":2785,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[9],"tags":[],"_links":{"self":[{"href":"https:\/\/fiskusa.com\/wp-json\/wp\/v2\/posts\/2784"}],"collection":[{"href":"https:\/\/fiskusa.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/fiskusa.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/fiskusa.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/fiskusa.com\/wp-json\/wp\/v2\/comments?post=2784"}],"version-history":[{"count":3,"href":"https:\/\/fiskusa.com\/wp-json\/wp\/v2\/posts\/2784\/revisions"}],"predecessor-version":[{"id":2788,"href":"https:\/\/fiskusa.com\/wp-json\/wp\/v2\/posts\/2784\/revisions\/2788"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/fiskusa.com\/wp-json\/wp\/v2\/media\/2785"}],"wp:attachment":[{"href":"https:\/\/fiskusa.com\/wp-json\/wp\/v2\/media?parent=2784"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/fiskusa.com\/wp-json\/wp\/v2\/categories?post=2784"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/fiskusa.com\/wp-json\/wp\/v2\/tags?post=2784"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n
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