Companies often use independent contractors to supplement their project teams – I know I did when running projects at GE. These individuals often provide specialized skills that are required for project activities. The US Department of Labor issued an Administrator’s Interpretation last month (July 15, 2015) that is likely to impact many projects that rely on independent contractors. Based upon my reading, many of these individuals will now be considered employees.
The Department of Labor has indicated that they are cracking down on the mis-classification of employees under the Fair Labor Standards Act (FSLA). The FSLA definition of an employer-employee relationship is for the company to, “suffer or permits to work.” A set of “economic reality factors” is used to determine if an individual is an employee under this definition of the FSLA or an independent contractor. This recent Interpretation changes how these factors are to be considered.
The economic reality factors used by the Department of Labor and the Courts are: “(A) the extent to which the work performed is an integral part of the employer’s business; (B) the worker’s opportunity for profit or loss depending on his or her managerial skill; (C) the extent of the relative investments of the employer and the worker; (D) whether the work performed requires special skills and initiative; (E) the permanency of the relationship; and (F) the degree of control exercised or retained by the employer.”
According to the Interpretation, “The factors should not be applied as a checklist, but rather the outcome must be determined by a qualitative rather than a quantitative analysis.” That sounds flexible, but whenever bureaucrats and courts get involved, it is likely to turn into a checklist. Therefore, unless a person meets at least four of these factors; they will likely be considered an employee instead of an independent contractor. Let’s examine each of the six factors from a project perspective.
Integral Part of the Business
The key to understanding this factor is that what is integral is the type of work, not the worker. The “integral work” is work that is at the core of what the business does. So for instance, a person on the phone in a call center is doing work that is an integral part of the business, even though that individual may be one of hundreds doing the same work. They are an employee. Whereas, an individual who is upgrading the payroll system at the call center is not performing a task that is integral to the nature of the business. They could be an independent contractor. That is not to say that a payroll system is not an integral part of the business, but it is not the type of work that the business performs.
The implication for projects is that if the business primarily performs project work – such as a construction firm or consulting firm – then everyone on those projects will likely be considered employees. However, independent contractors can do work on projects that change the business systems, processes, or facilities.
Worker’s Opportunity for Profit or Loss Depends on His or Her Managerial Skill
This factor deals with the control or influence of economic risk on the part of the worker. If the worker is negotiating contracts and prices, advertising and marketing their services, and selecting/prioritizing customers, then their managerial skill will impact profit and loss. They are considered independent contractors. However, if the worker is working from a standard price set by others and the only impact they have on their profit and loss is how many hours they work; they would be considered an employee.
The implication for projects is with time and material contracts. When an individual doing project work is paid a standard rate based upon the number of hours, and the number of hours is determined by the project manager and the needs of the project; that person will likely be considered an employee. A person who negotiates a fixed price contract for a project deliverable will likely be considered an independent contractor.
Extent of Relative Investments
The key on this factor is the “relative” investment made by both the company and the individual. To be considered an independent contractor, an individual may have made a significant investment in themselves or the “tools of the trade.” This is in comparison to the investment that the company would make on behalf of the individual to do the work. Examples of things that an independent contractor would invest in are tools, equipment, rent, insurance, and certification. A company may subsidize one or two of these, but the preponderance must be provided by the independent contractor.
For many in-house corporate projects, this is a difficult factor to overcome. Often the nature of the project work means that the company has made the major investment. This is especially true if the individual works on site where they are given an office, a computer, or access to systems and equipment. Project work that is done off-site or remotely, either at the individual’s facility or at a job site where the individual must bring in their own equipment is more likely to lead to an individual being considered an independent contractor.
Special Skills and Initiative
The key to this factor is the word, “initiative.” Special technical skills do not automatically lead to independent contractor status (although the lack of any special skills will mean that the individual does not meet this factor). Employees also have specialized technical skills also, in fact that is often the lead item in a job description. This factor is based upon the individual applying their technical skills in some business initiative beyond the technical work specified by the company.
Project work can again create problems for this factor. Generally, individuals are hired on projects for one of two reasons. In one instance, more “arms and legs” are needed to do some project work – in which case there are often no special skills so they are employees. The other instance is when the project plan specifically calls out what the individual is supposed to do. This may require special skills, but there is no initiative required so again they are employees. To meet this factor, the independent contractor must independently manage a portion of the project and that portion must require some special skills.
Permanency of the Relationship
This is probably the easiest factor to understand, but there are some nuances. If an individual consistently and primarily works for just one company, even though it may be on a variety of projects, they are an employee. The relationship is seen as a permanent one. This can be true even if the work is part-time or seasonal in nature. If an individual consistently works for only one employer, it is viewed as a permanent relationship, not an indefinite relationship. An independent contractor will have multiple customers/clients.
The problem for projects is if the same individual is used again and again by a company on multiple projects. That individual must have other clients and they must do a significant amount of work with them to be considered an individual contractor.
Degree of Control Exercised by Employer
This used to be an easy factor to analyse. If the person was on-site the degree of control was high and if off-site it was low. However, with the technology available today, the location of the worker is of minimal importance. What is crucial in this factor is the assignment of tasks, the setting of schedules, and oversight on the quality of the work performance. If the company manages those, the individual is an employee; if the individual manages those, they are likely an independent contractor.
The concern for projects is based upon the nature of project work. The project plan often specifies what must be done, when it must be done, and even how it must be done. So even though the individual is working from home, if they are working on a highly specified project activity, they will likely be considered employees. Independent contractors would be given an end date and deliverable and they would then determine how they would perform the work to meet these goals.
As you can tell from this assessment, many “independent contractors” working on projects will now be considered employees. This has significant financial implications for the business. Not the least of which is that small companies may suddenly find that they have over 50 employees and now fall within the Obamacare provisions. PMOs and project managers need to review these with their HR department and establish their new guidelines for use of independent contractors on projects.
This blog is not legal advice. It is a personal assessment about the application of the DOL Administrator’s Interpretation. You should consult with a lawyer about individual actions or grievances.