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Small Business Employee Benefits and HR Blog

Employee vs. Contractor - How to Classify Employees Correctly

Employee vs. ContractorEmployee vs contractor. When it comes to pay, taxes, and employee benefits worker classification matters.

On July 15th, the Department of Labor (DOL) issued an administrator’s interpretation emphasizing the importance of worker classification and clarifying the difference between employees and independent contractors.

New DOL Clarification on Independent Contractors

The recent DOL interpretation (Administrator’s Interpretation No. 2015-1is significant because it clarifies the difference between an employee and contractor.

To summarize, the DOL emphasizes that:

  • Under the FLSA, most workers are employees.

  • The primary approach to determining whether a worker is an employee or a contractor is the “economic realities” test, explained below.

  • An employer’s exertion of control over the tasks performed by the worker is less important.

  • The DOL will continue to aggressively examine the classification of workers as contractors.

Related: HR Rules You Need to Know

Employee vs Contractor - Economic Realities Test

The economic realities test looks at whether the worker is economically dependent on the employer or in business for him or herself.

To conduct an economic realities test an employer should look at six factors:

  1. The extent to which the work performed is an integral part of the employer’s business.

  2. The worker’s opportunity for profit or loss depending on his or managerial skill.

  3. The extent of the relative investments of the employer and the worker.

  4. Whether the work performed requires special skills and initiative.

  5. The permanency of the relationship.

  6. The degree of control exercised or retained by the employer.

Related: How to Recruit - Prepare to Hire Before You Take the Plunge

Conclusion

If your small business uses independent contractors, or you are considering going this route, it is important to make sure you are classifying workers correctly.

Under new guidance, the DOL has stressed that most work should be performed by employees. Additionally, more emphasis is being placed on the economic realities test.

What questions do you have about the difference between employees and contractors? Leave a question below.

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