Why Does It Matter?
Generally, employers must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to employees.  Generally, no withholding or taxes are required on payments to independent contractors.  However, employers who misclassify employees as independent contractors are subject to penalties on taxes owed.

How Do I Classify Hires?
The U.S. Supreme Court has ruled that no single rule or test determines whether an individual is an independent contractor or employee.  The total activity or situation controls, and factors to be considered are: (1) the extent to which the services rendered are an integral part of the principal’s business; (2) the permanency of the relationship; (3) the amount of the alleged contractor’s investment in facilities and equipment; (4) the nature and degree of control by the principal; (5) the alleged contractor’s opportunities for profit and loss; (6) the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor; and (7) the degree of independent business organization and operation.  Factors that are immaterial in classification: place of work, absence of formal employment agreement, licensing by governmental agency, and time or mode of pay.

What Does It Mean For Me?
Under the FLSA, if amended, employers will have to provide written notice of classification (employee or contractor) to each individual hired, alerting each hire of his or her status.  Employers will also be required to keep work and wage-type records for each independent contractor hired, similar to requirements for employees.  Employers will have six months from the effective date of the new law to notify current employees/contractors of their status, and then future workers will be informed at time of hire.  Failure to comply means all hires will be classified as employees without clear and convincing evidence to the contrary.  The act also sets civil penalties for employers who don’t comply with its provisions, including triple damages for willful violations, and including anti-retaliation provisions.

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