When Is a company or person an independent contractor?

by David Flaherty | 7 October 2024 11:50 am

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Independent contractors are critical to the success of the construction industry. Among other things, they provide valuable skilled labor in ways that have a direct impact on cost structures. Whether a company or individual is classified as an employee or independent contractor, however, has a plethora of legal implications ranging from liability to financial taxes. Unfortunately, the Department of Labor (DOL) has made it harder to figure out whether a company or person is an independent contractor because of changes it made to federal regulations.

The DOL’s Wage and Hour Division issued a final rule on independent contractor classifications under the Fair Labor Standards Act in January of this year. The new rule, which went into effect in March, uses a multifactor test that is factually ambiguous and offers little guidance on the weight to give each factor.  The result is a great deal of confusion that is likely to cause businesses to unnecessarily consume time and other resources figuring out how to classify workers. Litigation over how workers are classified is also likely.

The test is supposed to determine whether, “as a matter of economic reality,” the person or company being evaluated is economically dependent on an employer for work or in business for themselves. This vague description is said to be evaluated by a six-factor test that is equally unclear. That test asks about the following:

1. The opportunity for profit or loss depending on managerial skill;
2. Investments by the worker and the potential employer;
3. The degree of permanence of the work relationship;
4. The nature and degree of control;
5. Whether the work performed is an integral part of the potential employer’s business; and
6. Skill and initiative.

Each of these factors leaves a lot of room for interpretation. By way of example, what qualifies as “managerial skill?” What degree of “permanence” in a relationship qualifies to put it into employment status? Isn’t the work of all subcontractors “integral” to what a contractor is providing to the owner on
a project?

In the end, independent contractor status is about whether the person or contractor has control over their own situation. More weight should be given to issues like who controls the means and methods, who sets the price for the relevant work, and whether the person or company being evaluated can work for other people. Other factors like who is making investments, whose managerial skills are driving the process, and whether the work is integral to the alleged “employer” leave too much room for interpretation. To be fair, the federal courts have issued previous guidance on some of these harder-to-define elements. However, these decisions are not so clear as to prevent the DOL from bringing charges and requiring businesses to defend themselves at great cost.

While the government is selling it as ensuring workers are treated fairly in terms of compensation, there is no evidence that the old rule was failing workers in any meaningful way. The Biden Administration owes a great deal to organized labor so the public can judge the motivation behind this new rule by whom they choose to prosecute with it. If it is truly an attempt to protect workers, then it will be enforced in an even-handed way throughout the industry. The amorphous elements of this rule could easily ensnare companies and workers associated with organized labor. On the other hand, if the new rule is simply a move to help the trade unions masquerading as a policy designed to protect the worker, then it will be disproportionately enforced against open-shop companies.

Regardless of labor affiliation, construction companies should be adjusting.  It is reasonable to assume that this new rule was put into effect to allow the federal government to more closely regulate the construction industry. Construction companies should operate accordingly and evaluate their working relationships in the event the Wage and Hour Division decides to conduct an audit. Proper documentation and an understanding by employees of what they can and cannot do will be crucial parts of any investigation. Because violations of wage and hour laws can result in very large financial consequences and even debarment, this new rule should be taken seriously. Educate yourself on it and prepare for what lies ahead.

Josh Quinter is a commercial litigation attorney with a focus on construction law. He is also a member of the board of directors and a department chair at his law firm, Offit Kurman. Active in a number of construction trade and business organizations, Quinter is past president of the Mid-Atlantic Chapter of the Metal Building Contractors & Erectors Association (MBCEA), serves on the MBCEA national board, and is the organization’s general counsel. He can be reached at jquinter@offitkurman.com.

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