If you have been paying attention (here, here and here) the U.S. government has been cracking down on the use of independent contractors. In a big move to restrict “mis-classification” of employees as independent contractors the USDOL and the IRS have been stringent is applying the rules for determining independent contractor status. Now the National Labor Relations Board (NLRB) has weighed in on the fray and added an additional factor.
What are the rules?
According to the IRS the rules for determining if someone is an independent contractor is based upon three areas. These are:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (These include: things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? (Taken from the IRS website)
Part of the determination is whether the person runs the risk of profit or loss. An additional area is whether the person can perform their services for another company at the same time they are performing the services for you. This is what the NLRB has focused on.
The new rule!
According to Todd Lebowitz, of BakerHostetler, “The eleventh factor to be considered, …, is an overall evaluation of whether the individual is, in fact, rendering services as part of an independent business. The entrepreneurial opportunity for economic gain or loss is merely a part of that analysis, and that part of the analysis should focus narrowly on what the individuals have actually done with their entrepreneurial rights, rather than focusing on their theoretical opportunity. The Board’s position that entrepreneurial autonomy actually exercised is what matters, rather than the individual’s right to exercise that autonomy…”
Attorney Lebowitz feels this runs counter to “virtually every other articulated version of a Right to Control or Economic Realities test.” It is also counter to a decision by the D.C. Circuit Court.
Application and Implication
The NLRB used this new rule to then determine that Fed EX drivers were not independent contractors and thus could form a union. The implication of this decision is further reaching. If your independent contractors are not actually exercising their ability to work for other clients the NLRB said this was “theatrical” and not reality.
The big question is how much longer before the USDOL and the IRS adopt this standard as well?