Federal Administrative Rules
Part one of this post discussed the state level rules for when a worker is properly classified as an independent contractor as opposed to an employee. Federal agencies have also weighed in on the subject of employee vs. independent contractor status under the Fair Labor Standards Act. While these determinations are generally made in contexts other than workers’ compensation claims, they are also useful in resolving disputes over the issue in a workers’ compensation claim. This post outlines the guidance provided by three federal agencies in particular.
The Internal Revenue Service (IRS)
The IRS will sometimes make a determination when there is a dispute over whether a worker is an employee or an independent contractor. These inquiries are most frequently made for purposes of determining whether a worker has been properly classified for tax purposes. However, these determinations may also be relevant if the dispute reemerges in the context of workers’ compensation claims. The IRS applies a three-pronged test in issuing its decision, assessing behavioral factors, financial factors, and the type of relationship. These factors share much in common with how other agencies look at the problem. These factors are paraphrased below
- Behavioral: The extent of the worker’s control over their own schedule, how the work is done, and where it is done compared with the amount of direct supervision by the company paying the worker.
- Financial: The extent of a worker’s control over business expenses, whether the worker bears a risk of profit and loss.
- Type of relationship: The existence or nonexistence of a contract or benefits package, the expectation or lack thereof that the work will continue indefinitely.
For more information see the IRS guidance page.
The Small Business Administration (SBA)
The SBA also provides guidance on the classification issue. The SBA does not make determinations of these issues or promulgate rules, but it does provide guidance for small businesses. These factors include (direct quote follows):
- The extent to which the services rendered are an integral part of the principal’s business;
- The permanency of the relationship;
- The amount of the alleged contractor’s investment in facilities and equipment;
- The nature and degree of control by the principal;
- The alleged contractor’s opportunities for profit and loss;
- The amount of initiative, judgment, or foresight in open market competition with others that is required for the success of the claimed independent contractor; and
- The degree of independent business organization and operation.
For further information, see the SBA’s guidance on the subject, containing the above list and additional information).
Department of Labor
The Federal Department of Labor also provides guidance on the independent contractor/employee distinction. The Labor Department makes these determinations as part of its mission to enforce the Fair Labor Standards Act. As with the IRS, these determinations are generally not carried out in the context of workers’ compensation claims. However, they will be viewed as highly relevant if a dispute over the issue arises. The Labor Department’s standard for this determination is to assess the “economic realities” of the relationship. The inquiry considers factors such as:
- Is the work an integral part of the employer’s business?
- Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
- How does the worker’s relative investment compare to the employer’s investment?
- Does the work require special skill or initiative?
- Is the relationship between the worker and the employer permanent or indefinite?
- What is the nature and degree of the employer’s control?
More details are available through this Labor Department Guidance Letter (PDF).
Contact a Georgia Workers’ Compensation Attorney Today
If you have been injured in a work-related incident, you still have rights, even if your employer classifies you as an independent contractor. Contact the experienced attorneys at Bader Law Firm for a free consultation. We know what it takes to dispute an improper classification.