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Classifying an ‘Employee’

On Behalf of | Sep 19, 2016 | Business Law, Employment Law

In a 15-page memo released last summer, the United States Department of Labor (DOL) sought to help employers and legal officials better understand the difference between an independent contractor and an employee. However, this clarification has had further implications on filing federal employment taxes, in addition to how an employer must pay and offer benefits to certain individuals.

Although it may not seem like a pressing issue, the definition of the term ‘employee’ has broad reaching implications. The change in how the term is interpreted means necessary adjustments to how employees are paid, what taxes are paid on their behalf, the benefit programs offered through employment, and the liability that an employer has towards their staff. Certain service companies, such as those in the technology sector, have classified their employees as independent contractors for many years—using the classification to lower labor costs. The trend is not isolated to tech firms though, as the DOL has reported that the misclassification of employees by businesses has been rapidly growing throughout various sectors in the United States. But, under the 2015 guidance, companies may need to change this practice or risk facing legal repercussions.

Over the past twelve months, the DOL has stressed that it is important to assess the economic realities regarding the employment relationship with a hired individual.  The difference between the classification of an hourly employee and an exempt one pertains not only the salary that they are eligible for, but whether they are qualified to receive overtime rates. Further, as more state and local governments succumb to pressure to raise the minimum wage for employees, more employers may seek to classify staff in other ways.

The DOL has provided a test comprised of six questions that intend to simplify the classification process while maintaining adherence to the Fair Labor Standards Act:

  • Is the work an integral part of the employer’s business?
  • Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
  • How does the worker’s relative investment compare to the employer’s investment?
  • Does the work performed require special skill and initiative?
  • Is the relationship between the worker and the employer permanent or indefinite?
  • What is the nature and degree of the employer’s control over the employee?

While the test is not a concrete determinant of employment classification, it creates a means for employers to more appropriately label an employment relationship based on individual circumstances. Should an employer continue to improperly classify their employees, they could be subject to lawsuits, fines and penalties.

For more information on the classification of employees, and general issues related to employment law, contact the attorneys at Snee, Lutche, Helmlinger & Spielberger today.