Investigating the Independent Contractor Relationship

Jul 21 2015 - Independent Contractor, Workplace Policies - Brad Sterling

Federal and state agencies continue to pay close attention to the independent contractor employment relationship – and not the type of attention that’s good for employers.

The U.S. Department of Labor (DOL) and California’s Division of Labor Standards Enforcement (DLSE) allege that many employers misuse the “independent contractor” title to circumvent wage-and-hour laws.

A five-year DOL investigation in Utah and Arizona resulted in 16 employers agreeing to pay $700,000 in back wages, damages and penalties. The DOL, the U.S. Department of Justice and Utah’s Worker Classification Coordinated Enforcement Council worked together during the investigation, determining that more than 1,000 construction workers were misclassified as independent contractors.

“Misclassified employees are often denied access to the critical benefits and protections they are entitled,” according to a blog post published on July 15 by David Weil, administrator of the DOL’s Wage and Hour Division (WHD). “Misclassification also generates substantial losses to the federal government and state governments in the form of lower tax revenues, as well as to state unemployment insurance and workers’ compensation funds.”

Weil’s blog post also noted that the WHD issued an administrator’s interpretation that analyzes how the Fair Labor Standards Act (FLSA) defines “employ” and how that definition “guides the determination of whether workers are employees or independent contractors under the law.”

Employers should note that the DOL is emphasizing what it calls the breadth of the FLSA’s definition of “employ” – meaning that, in the DOL’s eyes, many “independent contractor” employment relationships may not pass legal muster.

Simply calling a person an “independent contractor” does not mean that the person actually is an independent contractor in the eyes of federal and state wage-and-hour enforcement agencies. These agencies use strict tests to determine whether the employment relationship meets the applicable legal requirements.

Employers should set aside some time to review the WHD’s interpretation. It’s strongly recommended that employers seek legal counsel when creating independent contractor relationships. The penalties for misclassification can be severe.

Shane Peterson, Senior Editor

CalChamber members can visit the HR Library’s Independent Contractor section for more information. Not a member? See how CalChamber can help you.

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