Running a Business: Are Your Independent Contractors Actually Employees?

Kevin H. owns a successful construction company. For 20 years, Kevin and crew built luxury homes along Lake Michigan, primarily north of the Wisconsin border. Although his business is worth millions of dollars, Kevin still runs the day-to-day operations and makes the big decisions. His brother does the books, and everyone else working on his projects is an independent contractor. Kevin likes it that way. Not only are the independent contractors responsible for their own healthcare, but they also must pay their own taxes and wholly fund their own retirement accounts. They also cannot demand unemployment.

In fact, one reason Kevin has been able to sock away so much money is because his business has never had any “real” employees, other than his brother. That may be about to change. According to the U.S. Department of Labor (DOL), misclassification of employees as independent contractors has become a real problem. When employees are improperly classified as independent contractors, they may not receive vital workplace protections, such as minimum wage, overtime pay, unemployment insurance, or workers’ compensation when hurt on the job.

Per the DOL, misclassification also leads to lower tax revenues for the government, which may be the real reason Kevin has become concerned that his personal gravy train is about to end.

In 2011, the Obama Administration began to ramp up its efforts to rein in the use of independent contractors and to transform those workers into actual employees, eligible to be covered by workplace benefits. In 2015, it released a checklist designed to determine whether a person is an independent contractor, or in fact, an employee. Relevant factors include:

  • The degree to which control is exercised or retained by the employer;
  • The worker’s opportunities for profit or loss;
  • The relative investments of the employer and worker;
  • The permanency and length of the relationship between the business and individual;
  • The degree of skill needed to do the person’s work;
  • The degree to which the work performed by the individual is an integral part of the employer’s business.

A number of these points cause Kevin to feel a sting of anxiety. Six independent contractors have worked with him for 10 years or more, and Kevin is the first to admit that one of the key qualities that sets his construction business apart from the competition is excellence in masonry and old-fashioned inlaid hardwoods. Both his mason and flooring expert have been with him since the beginning.

A labor website called In These Times wrote last summer that the DOL decision could mean the end of “wage theft” through independent contractor misclassification. Kevin knows that if the DOL does ever come around asking questions, he could be in serious trouble. He figures he has some time though, given the fact that high-profile companies like Federal Express engage in similar practices and will likely be early targets of government crackdowns. Still, he is concerned.

Contact us at McChain, Miller, Nissman if you have concerns from either position – as a business owner or an independent contractor. We can help you sort things out.