Employee versus Contractor: A Six-Part Test for Determining Classification

Business team.

(DGIwire) — If recent headlines are any indication, even the most progressive and forward-thinking companies can have difficulty determining the difference between employees and independent contractors. While it may seem like an academic distinction to some, it can make a huge impact in terms of profit margins, avoiding trouble with the IRS and maintaining good business ethics. Here is a very brief summary of a six-part test recently issued by the U.S. Department of Labor and reported on by Insurance Journal, for telling the difference between the two:

  • Is the work an integral part of the employer’s business? According to a memo issued by Wage and Hours Administrator David Weil, courts have typically found that if a worker performs the primary type of work that the employer performs for his customers or clients, or performs a job that is one part of the business’ overall process, then that worker is the key to driving that business, and thus economically dependent on the employer. An independent contractor should not have any control over the day-to-day business operations that may affect the employer’s ability to serve its clients.
  • Does the worker’s managerial skill affect his or her opportunity for profit or loss?
    An employee’s managerial skill usually doesn’t affect his or her own personal potential for profit or loss. Independent workers are responsible for decisions like purchasing more materials, setting their own schedule, acquiring new technology or expanding their business. Employees usually don’t suffer a loss from these kinds of decisions made by their employers.
  • How does the worker’s relative investment compare to the employer’s investment?
    Generally speaking, the more a worker invests in a business relative to his employer, the more likely he is to be a contractor. If an employer invests a much higher amount in the business, the worker is more likely an employee.
  • Does the work performed require special skill and initiative? This is a judgment of business skills rather than technical skills. A full-time graphic designer might be highly skilled, but if he doesn’t display business initiatives to find work and promote his business, he is more likely an employee.
  • Is the relationship between the worker and the employer permanent or indefinite?
    In most cases, workers on a temporary contract are more likely to be engaging in at-will contract labor. Independent contractors will typically avoid a long-term relationship with one employer. If the employer’s relationship with the worker extends into the foreseeable future with no end in sight, the worker is more likely an employee.
  • What is the nature and degree of the employer’s control? True independent workers will control meaningful aspects of the work they are performing such that they can be viewed as a person conducting a business. If an employer directly manages a worker—even if that worker is working off-site—that worker is probably an employee.

“It amazes me how often companies, even really successful and established ones, can run the risk of misclassifying workers,” says Atrium Staffing CEO Rebecca Cenni. “In most cases, it’s not an intentional mix-up but rather just a case of misunderstanding exactly where the line is drawn.”

Atrium’s experienced compliance team uses a white-glove approach that promotes a comprehensive and consistent classification method to evaluate workers. Atrium is a New York City-based talent solutions firm, focused on providing contingent workforce management services for mid-size and Fortune 500 companies in nearly every industry. Atrium’s expertise includes regional Temporary and Direct Hire Staffing, national Employer of Record Payrolling, national Independent Contractor Engagement and specialty Intern Recruiting Services.

“Companies that keep abreast of the evolving criteria for classifying employees and contractors have a definite leg up over companies that don’t,” Cenni adds.

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