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The US Department of Labor Weighs In on “Employee v. Independent Contractor”

The US Department of Labor has issued an update to it’s own six factor test for whether to classify a person as an “employee” or an “independent contractor.”  This is a hotly debated issue here in California, and in the Department of Labor/Wage and Hour Division’s Administrator’s Interpretation ­2015-1 (released in mid-July 2015), the Department seems to be leaning to the economic impact of the relationship between a person an a company instead of the control the company has over the work performed by its workers.

In its report the Department of Labor expounds upon the expanding factor of econdomic dependence in this manner:

“The factors typically include: (A) the extent to which the work performed is an integral part of the employer’s business; (B) the worker’s opportunity for profit or loss depending on his or her managerial skill; (C) the extent of the relative investments of the employer and the worker; (D) whether the work performed requires special skills and initiative; (E) the permanency of the relationship; and (F) the degree of control exercised or retained by the employer.”

This is a concerning development for many reasons.  Primarily, it appears to change one of the foundational tests that most companies have employed to date: the degree of control.  If you ask most California employers to define an “independent contractor” relationship they would answer with factors such as:

1. The control of the company over work hours, processes, etc.

2. The provision of equipment, technology, tools, information

3. The degree of control and management exerted over the primary focus of the worker by the company

The Department of Labor’s Administrator’s Interpretation may be yet another signal that the IRS (and Ultimately California’s taxing authorities) are truly headed in a different direction.  If the question is not one of control, but rather, a central question that relates to the percentage of income derived by the worker from your company, the independent contractor designation has been significantly narrowed.

These are concerning developments, and we are seeing more audits, both by the IRS and by California tax agencies focused upon the independent contractor issue.  If you have been contacted for a tax audit, or received notification challenging the independent nature of your work force you should act immediately.  We invite you to call 866-631-3470 for a complimentary and substantive consultation.