Worker Classification – Are Your Workers Subcontractors or Employees

08.10.2013
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There is often a tendency in the green industries to hire people as laborers and state that the worker is a ‘subcontractor’ or ‘independent contractor’. I don’t know when or where this trend started, but the labels are often used inappropriately by business owners and contractors.

I have heard from many people that they believe this is ok, as long as the worker is given a ‘subcontractor agreement’ and an IRS Form 1099 at the end of the year. For whatever reason, there is the misconception that taking these steps makes the worker a legitimate subcontractor. Unfortunately for business owners, when the Department of Labor visits your business to conduct an audit, they will determine whether the workers are subcontractors or employees. In the event workers have been mis-classified, the Department of Labor can assess fines, back wages and overtime pay. For the purposes of this article, I use the term ‘subcontractor’ however, the term ‘independent contractor’ is interchangeable and using one term instead of the other has no real bearing on whether a worker is properly classified.

So, how can a business make sure that workers are properly classified? The Fair Labor Standards Act (FLSA) is one of the major laws that govern worker classification. The U.S. Supreme Court has addressed FLSA worker classification on multiple occasions and has ruled that there is not a single rule or test which can, on its own, be used to determine worker status. Instead, the Court has found that taking the total situation into account is what controls status determination. There are many factors which the Court has found influential in making this determination, including:

1. The extent to which services rendered are an integral part of the principal’s business. This means that if the subcontracted work is a central part of the contractors business, then the worker is probably correctly classified as an employee instead of a subcontractor. For example, lawn mowing is an integral part of a lawncare company’s business. If the company hires someone to perform law mowing, then this worker should most likely be classified as an employee because of the type and nature of the work they are doing. Alternatively, if the lawn care company subcontracts irrigation work to an individual then this maybe a legitimate subcontract because the irrigation work is not central to the lawncare company’s business.

2. The permanency of the relationship. If a worker has a long term relationship with a company and does not work for other companies, there is a sense of permanency to the working relationship. The more permanency there is, the more likely it is that worker should be classified as an employee instead of a subcontractor.

3. The amount of the alleged worker’s investment in facilities and equipment. If the worker uses all of the businesses tools, equipment, and materials, then they tend to look more as if they should be classified as an employee. On the other hand, if the worker has their own shop, tools, trucks, etc. then they appear to be a genuine subcontractor.

4. The nature and degree of control by the principal. The more control a business has over a worker, the more likely they are to be an employee. For example, if the worker is required to show up at a certain time each day and take specific breaks each day, then there is a lot of control. Additionally, if the workers hour to hour or day to day projects are directed by the business, then the worker should probably be classified as an employee. Alternatively, if the business doesn’t control the worker and broadly directs how a project is to be done, with timeframes to be controlled by the worker, then the worker may be properly classified as a subcontractor.

5. The worker’s opportunities for profit and loss. True subcontractors have the ability to make more (or less) money on a project depending on how they manage the project. This may mean finding a better price on the materials for their part of the project, or working more efficiently on the project. When a worker is paid an hourly wage, regardless of the amount of time it takes to complete a project, they appear to be an employee. When a worker provides a bid for each individual project, they appear more like a subcontractor.

6. The amount of initiative, judgment, or foresight in open market competition with others is required for the success of the worker. Does the worker hold themselves out to the public, or others as a business, or as being for hire? When this happens, the worker appears more like a subcontractor. The same is true when multiple subcontractors bid for the same work. If a worker is simply given a task to complete and there is no competition for the task, then the worker appears more like an employee.

7. The degree of independent business organization and operation. True subcontractors often have a business entity of their own, such as an LLC or incorporation, for which they perform work. Workers without any independent business entity or separate bookkeeping for their own services appear more like employees

The information above is not conclusive on its own. Just because a worker appears to be a subcontractor for four of the standards does not mean they are properly classified as a subcontractor. At the same time, a worker doesn’t have to meet all 7 standards in order to be properly classified. There is no black and white answer for how to classify workers; instead the DOL takes the above factors into account when looking at the entire working relationship between a worker and a business.

Each state may have their own standards for worker classification as well, making things further complicated. Check with your state to see what else may apply to your business. As a general rule, the Federal law will be the one to follow, unless special circumstances apply. To find a listing of the state labor agencies: click here

For more information about the FLSA and worker classification click here.

As I tell people so often when I am presenting seminars and giving speeches: I am only the messenger. I do not write the laws and rules, I only tell you what they are. So, if you do not like the way that the law is affecting your business, do something about it. Become involved in commenting on proposed regulations and contact your congressperson about pending legislation. Finally, get the word out to others in our industry because there is power in numbers.

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