USDOL Issues New Guidance on Employee Classifications

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The U.S. Department of Labor has issued an opinion letter that clarifies the distinction between who is an employee and an independent contractor. However, the new guidance, which may make it easier for employers that utilize contract workers to avoid paying payroll taxes could be in conflict with state standards.  

In the Department’s  letter, the unidentified company - whose workers, it appears, clean residences - will not have to offer the federal minimum wage or overtime, or pay a share of Social Security taxes because the company “does not impose requirements on how its service providers must perform their work, such as what transportation route to take, the order in which to clean an apartment” or the type of tools and materials they must use.

The description suggested that it was referring to a company, like GrubHub, Handy, Uber, Lyft, Postmates, Thumbtack, YourMechanic or TaskRabbit, whose platforms allow customers to hire workers through an online interface.

Decisions about employment status typically hinge on several factors, including the extent to which the employer controls how the worker does his or her job, and how central the job the worker performs is to the company’s business.

In explaining its conclusion about the company in question, the Department cited the fact that workers had the freedom to choose when, where and how long they worked; the fact that they provided their own equipment; and the fact that the company did not have a mandatory training program.

The Department also said the workers were not an integral part of the company’s business because they “do not develop, maintain or otherwise operate” the platform that connects them with customers.

The guidance may encourage companies to reclassify employees as contractors, says John Sarno, president of the Employers Association of New Jersey.

“Any business that dispatches employees, such as plumbers or electricians or house cleaners, could deem them contractors by using a digital interface to coordinate the work and meeting a few other criteria” he says.

However, Sarno notes that standards in New Jersey pose stricter standards.

For example, on March 20th, the N.J. Department of Labor and Workforce Development sent a letter to the state’s accountants reminding that that in classifying workers for their business clients, the state uses the “ABC Test.”

According to the letter: “By misclassifying workers as independent contractors - workers who receive 1099s, not W-2s - employers avoid paying unemployment and disability taxes, costing state and federal taxpayers untold millions of dollars. In New Jersey alone, auditors have identified more than $80 million in underreported employer contributions since 2010.”  

Under the ABC Test, a worker is an independent contractor if three factors are met:

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  2. The worker performs work that is outside the usual course of the hiring entity's business.
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

“Does the mere fact that a housecleaner, using her own cleaning supplies and car, is dispatched by a digital interface make her an independent contractor? Does the website transaction mean she is a gig worker? These are questions to be determined” says Sarno.