By Alejandra Cancino for Chicago Tribune
Wednesday, the Labor Department spelled out how to determine whether a worker is an employee or an independent contractor.
The guidance comes as a growing number of employers are contracting out services to third parties, including subcontractors, temporary agencies and franchisees. Many of those companies, including Uber and Groupon, have been sued by workers who claim they’ve been “misclassified” as independent contractors when they are really employees.
Worker advocates say companies misclassify employees to save costs by not paying payroll taxes, unemployment insurance, workers’ compensation insurance and overtime.
The guidance, which labor and employment attorneys said doesn’t change the current law but provides clarification, comes on the heels of a proposal by the Labor Department that would increase the threshold used to determine when employees qualify for overtime pay. The proposal would require employers to pay overtime to salaried workers earning less than $50,440. That’s more than double the current threshold of $23,660 established in 2004.
The 15-page document reminds employers that under the Fair Labor Standards Act, most workers are employees because it broadly defines “employ” as “to suffer or permit to work.” The department says employers should use the “economic realities test,” which focuses on whether a worker is economically dependent on the employer and takes into account several factors, such as the degree of control imposed on the worker and the worker’s ability to profit. The department said the factors must be considered as a whole and not in isolation.
The department is working with the Internal Revenue Service and 22 states to curb the practice of misclassification.
A report published in June by the Economic Policy Institute, a labor-oriented think tank based in Washington, said the practice of subcontracting work to companies that, in turn, also subcontract has apparently made it easier for misclassification to occur.
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