The U.S. Department of Labor (DOL) issued guidance on July 15 aimed at curbing the misclassification of employees as independent contractors. The guidance provides several examples of workers in the construction industry. It is now clear that the DOL is bent on targeting contractors and subcontractors. If you have mechanics, installers, estimators, or any workers functioning as an independent contractor, you are probably at risk.
The DOL’s guidance begins by stating that most workers should be classified as employees and not independent contractors. According to the DOL, only workers that are genuinely in business for themselves may be classified as independent contractors. The DOL uses six factors to determine whether someone is in business for him/herself:
- Is the worker’s work an “integral part” of the employer’s business? According to the DOL, “for a construction company that frames residential homes, carpenters are integral to the employer’s business because the company is in business to frame homes, and carpentry is an integral part of providing that service.” Therefore, hiring an individual who uses the tools of the trade as an independent contractor is risky business for almost any construction company.
- Does the worker’s managerial skill affect the worker’s opportunity for profit and loss? According to the DOL, a true independent contractor has the opportunity not only to make money but to lose it by making poor business decisions. The DOL is looking for independent contractors to exercise business judgment (not just decide how many hours they are going to work or how many projects they are going to accept from the employer).
- How does the worker’s relative investment compare to the employer’s investment? In order to be a true independent contractor, the worker must make a substantial investment (and therefore undertake some risk for a loss). The DOL’s view of what qualifies as a substantial investment may surprise you. Merely purchasing hand tools and other equipment is not enough. The DOL even cited a case where a group of rigging welders had invested in equipped trucks costing between $35,000 and $40,000 as being too small of an investment.
- Does the work performed require special skill and initiative? For this factor, the DOL focuses on business skills and not technical skills and uses the following example: “A highly skilled carpenter provides carpentry services for a construction firm; however, such skills are not exercised in an independent manner. For example, the carpenter does not make any independent judgments at the job site beyond the work that he is doing for that job; he does not determine the sequence of the work, order additional materials, or think about bidding the next job, but rather is told what work to perform where. In this scenario, the carpenter, although highly skilled technically, is not demonstrating the skill and initiative of an independent contractor (such as managerial and business skills).”
- Is the relationship between the worker and the employer permanent or indefinite? According to the DOL, a worker who works for the same employer for a sustained period of time is not showing the business initiative that one would expect from a true independent contractor. Workers who work until they are terminated look like at-will employees (not independent contractors).
- What is the nature and degree of the employer’s control? According to the DOL, in order to qualify as an independent contractor, the worker must control meaningful aspects of his own business and stand as a separate economic entity. This means that imposing quality control measures and schedules on a worker will likely render him/her an independent contractor.
In sum, the DOL’s guidance marks a clear signal to those in the construction community that using independent contractors carries significant risks. Mitigating measures, like issuing 1099 Forms and entering into written independent subcontractor agreements, will more often than not fail to save the day. These rules hold true for workers in the field and those performing office/non-manual work.
We have worked with dozens of contractors on classification issues. If you have any questions about the proper classification of someone who performs work for your company, please contact Marc Furman or Jonathan Landesman.