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.
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