Independent Contractor Rules – Part 1

Independent Contractor Rules - Part 1 by Alan Krystal

{3:42 minutes to read} In July, the U.S. Department of Labor published a 15-page administrator’s interpretation of the employee vs. independent contractor standards. This document is not so much a change in the standards as it is a change in the manner in which the government is interpreting the employee vs. independent contractor test.

In effect, there is going to be a stricter interpretation of the structural relationship, which means there is a greater likelihood that a worker who a company intended to be an independent contractor is, in fact, going to be deemed an employee by the government. Federal and state authorities are increasingly committed to combating worker misclassification, and independent contractor designations are being challenged with closer scrutiny.

Companies will now face the challenge of taking a careful review of their independent contractor relationships and reassess whether they can withstand outside scrutiny. The traditional standard test was the IRS 20 factor test, which included factors such as:

  • Whether or not the worker realized a profit or loss;
  • Whether or not there was control of the worker by the business;
  • Whether or not worker’s tools and materials were provided by the business; and
  • Who set the work schedule.

The most recent administrator’s interpretation refers to increased reliance upon the “suffer or permit” standard which, in addition to the standard criteria, focuses upon whether the worker is economically dependent upon the business.

A Two-Fold Problem

  1. This is a two-fold problem. In theory, the government is trying to prevent worker exploitation and is also attempting to ensure that the independent contractor arrangement is not being used as a subterfuge for a company to avoid:
    • Paying taxes;
    • Providing unemployment benefits;
    • Paying workers compensation; and 
    • Falling within the purview of the Affordable Care Act.

The government is committed to eliminating the practice of willful misclassification that does, unfortunately, exist in the real world.

  1. On the other hand, there are companies who intend honorably to engage independent contractors who are now going to face increased factual burdens in having to defend against misclassification challenges.

Hiring an Independent Contractor

A critical factor to avoid the consequences of misclassification is making sure that you vet the person who you’re going to be contracting as carefully as possible.  You want to:

  1. Ensure that the worker is a corporate entity, as opposed to an individual.
  2. Confirm that the worker does work for other business entities.
  3. Make sure that you have a comprehensive contract, which proves a number of factors in terms of a finite relationship:
    • Responsibility for materials;
    • Ability to set schedules;
    • An obligation to obtain his own liability and workers compensation insurance;
    • An acknowledgment that this is an independent contractor relationship with no entitlement to employee benefits; and 
    • Definite start and termination date.

Part 2 will deal with additional strategies for addressing the independent contractor issue.

Alan Krystal


Alan Krystal

Alan H. Krystal, P.C.
631 780 6555