Making Sure Sub-Contractors Don't Become Employees - Part Two

Written by on 8/10/2016 3:00 AM in , , . It has 1 Comments.


In our last installment, we discussed how the IRS identified subcontractors from employees. In this one, we’ll look into the guidelines from the Department of Labor (DOL) and how they could impact your business in terms of employee management

Subcontractor guidelines from the DOL
The DOL employs an “economic realities test” to ascertain the status of workers as either employees or subcontractors. No single factor determines status; each is considered in relation to others and includes:

  • If work performed is integral to the business.
    Integral work lends to employee status, whereas duties deemed not central to the business are more indicative of subcontractors.
  • If a worker’s managerial skills affect profit/loss.
    Employee management skills – indicated by the hiring or supervision of workers or investment in equipment – will be analyzed to determine whether they affect a worker’s opportunity for profit and loss. Set wages and shareholder programs indicate employees; the value of subcontractors' work is not linked to P&L.
  • Investments in facilities and equipment.
    Independent contractors must make some investment and bear some risk of loss for a subcontractor status to be indicated - save for investments in tools and equipment.
  • Worker skill and initiative.
    Subcontractors are typically free to exercise their own initiative and judgement, including setting prices and selecting work, whereas employees are under employer directive.
  • Relationship permanency.
    With temporary relationships implying a subcontractor status and permanent positions proving the opposite.
  • Degree of employer control.
    The more control is in the hands of the business, the further the relationship leans toward employer/employee status.

Have employee management issues left you on the hook for workmans’ comp headaches? Minnesota Comp Advisor can help. Contact us today.

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