Independent Contractor or Employee?: US Dept of Labor Stiffens Criteria

US DOLThe U.S. Dept. of Labor (DOL) is stiffening the criteria by which it determines whether a worker is an independent contractor or employee. The DOL’s rules control whether you qualify for a few things—minimum wage, overtime, hours worked, child labor, and time and payroll records. Employees do, contractors don’t. 

Other agencies control other financial aspects of employment. The IRS controls whether you can file federal income taxes as a business or employee, other tax agencies control how you can file their taxes, state employment agencies control whether you are a contractor or employee for their purposes, and so on.

The DOL rules do NOT control how the IRS views you, and they do NOT control how your state and local agencies view you. So you might think they’re unimportant. But don’t be fooled. The DOL is on a mission.

A few years ago it teamed up with the IRS to coordinate and homogenize standards and compliance across the country. Critically, half the states have joined the effort as well. A core feature is that agencies will do joint investigations of workers, and even when they don’t, each agency will tell all the others about investigations they conduct. Thus, if your state income tax agency decides you’re really an employee, the IRS and DOL will know about it and likely reclassify you too. When I read the DOL documents, I realized that many of the times I wrote manuals as an independent contractor in Silicon Valley I probably wouldn’t have passed muster under the new stiffer criteria.

What does it matter if you’re reclassified as an employee? In the short term, you’ll have to refile your federal income taxes, removing all your Schedule C deductions for that particular work. You’ll have to reduce your corresponding SEP-IRA contributions too, and you’ll be refunded the share of FICA taxes that employers normally pay. If your state or locality collects related taxes, you’ll have to refile with them too.

In the long term, as the stiffer criteria become widely known, it looks to me as though you’ll have to align your business practices with the new criteria or seek employee work. Or change careers entirely. Which I’ll bet you don’t want to do.

Mike Bradley
NWU Contract Adviser