Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

Employee vs. Independent Contractor – Dep’t of Labor proposal would changed definition of employee

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Picture courtesy of DollarPhotoClub.com

Picture courtesy of DollarPhotoClub.com

This discussion is cross-posted from my other blog, Nonprofit Update. Although the context of my discussion is how this issue applies to charities, the issues are of even more importance to for-profit businesses.

In response to the rapid growth of what is called the “gig economy” or freelancers, the Department of Labor has issued an interpretation which tightens the definition of who is an employee.

I think it would be wise for the finance team and leadership of charities to look at this issue.

While this is aimed at companies like Lyft, Uber, Airbnb, and any other tech company that pays freelancers on an ad hoc job-by-job basis, it clearly applies to traditional businesses. This applies to charities.

It might be wise to think about how your charity is handling the independent contractor issue.

The Wage and Hour Division of DOL issued Administrator’s Interpretation 2015-1 (access to this copy provided by the WSJ.)

The Wall Street Journal explains Employees vs. Independent Contractors: US Weighs In on Debate Over How to Classify Workers.

The WSJ article explains that DOL believes many independent contractors should be moved to employee status. The DOL believes the definition of employee is far broader not only than what many employers believe but is even broader than what many courts have ruled.

Article says many businesses and labor attorneys see this is a significant shift in policy. The head of the Wage and Hour Division says there is no change in policy.

I have not been following court cases on this issue, so I’m not familiar with rulings in play now. After reading the Interpretation, it sure seems to me like there has been a major shift in definition.

Consider the following questions the DOL says should be considered. Their perspective is to apply the “economic reality” concept.

Disclaimer: I will mention the tests raised and provide my interpretation from the perspective of a small business owner. I do not know anywhere near enough to give legal advice, so consider this post worth what you paid for it (in other words, zero). If this matters to you at all, you need to read the original document for yourself or get advice from an attorney.

Actually, after I read this Interpretation, I think all charities who have any independent contractors need to check in with a labor law attorney.

Here are the questions:

A. Is the Work an Integral Part of the Employer’s Business?

People on the phone at a call center are cited as an example of services that are “integral” to a business. Also mentioned is anyone in the trades working on a construction site. DOL’s perspective is that carpenters, plumbers, and electricians working for a company at a job site cannot be independent contractors.

Developing the software for a construction company to schedule work is cited as something that is not integral. Those tasks could be accomplished by independent contractors.

B. Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?

Does the way that a person carries out the work provide an opportunity for the project to produce a profit or take a loss? Example is a worker who has to decide who to hire to help with the project, what supplies to buy, or the sequencing of work. Such decisions could create a profit or be inefficient leading to a loss.

Seems to me that the DOL would require an individual who is paid based on number of hours of their effort to be treated as an employee.

C. How Does the Worker’s Relative Investment Compare to the Employer’s Investment?

This isn’t relative as in proportion to the company’s investment in their business and the service provider’s investment in his or her business. Instead, the Interpretation states this is the relative dollar amounts of each.

A mechanic or trades person providing their own tools does not count, according to the Interpretation. Example cited is a court ruling about a welder who provided his own truck and tools to do welding at a construction site.  The worker having equipment that cost around $30,000 or $40,000 is relatively small compared to a construction company who has hundreds of thousands of dollars invested at the worksite.

I really don’t understand how this could leave any independent contractors in that category. Any company that brings in one specialized provider or hires a large pool of providers would have a relative investment that is far larger than any independent contractor. Picture a company like Uber, who has software that cost many millions of dollars compared to drivers who bring their own smart phone and $10,000 or $50,000 car. Or even picture a large industrial company (with hundreds of millions of dollars invested in plant) hiring a small law firm (with a rented office and a few computers) to defend against slip-and-fall litigation or to review a proposed contract. The investment by the law firm would be minor compared to the manufacturing equipment owned by the company.

While the law firm might be an independent contractor on the other tests, using my businessman’s brain it seems to me under this test a small law firm would be in an employee relationship. What do you think? Am I missing the point?

D. Does the Work Performed Require Special Skill and Initiative?

Comments here point not just to whether the service provider has specialized skills but is required to use initiative in the application of those skills. Construction workers are cited as people who have special skills but do not apply initiative in their efforts. The company tells them what location on the worksite to work, provides the materials, and tells them the sequence of tasks.

E. Is the Relationship between the Worker and the Employer Permanent or Indefinite?

If I understand this correctly, an open-ended relationship points toward an employee relationship.

F. What is the Nature and Degree of the Employer’s Control?

The interpretation says people working from home or working remotely can still be controlled. Even setting schedules, requiring certain attire, or specifying certain tasks can trigger sufficient control to create an employment relationship.

I don’t quite understand the discussion here. The conversation throughout the memorandum expands to bring in to play whether the service provider is “economically dependent on the employer”.

I’m starting to get the picture this is pointing towards a service provider having many companies that are served and not just one or two.

In my CPA brain I’m thinking of the concept we have in the audit world where I consider whether any one client generates such a large portion of my annual billings that they could push me around. In my mind I am always ready to fire any client that refuses to obey the law or insists on cooking the books. Being ready to resign an engagement not only makes me independent in terms of audit rules, but also means I am not in the status of being “economically dependent” on that client.

Get informed counsel

If my non-technical, non-legal description of the Interpretation raises any concern to you at all, you need to read the Interpretation and then check with an informed labor law attorney. Please get advice. The downside of getting the classification wrong can get serious.

Written by Jim Ulvog

July 23, 2015, 9:07 am at 9:07 am

Posted in Accounting

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