Independent Contractor vs. Employee – Department of Labor (DoL) Perspective (Part 1)

This video and article are the first of a two-part series where we provide an overview of the Department of Labor (DoL) position on independent contractor classifications. This series presents a mock audit to give you a first-hand perspective of the types of questions that DoL investigators ask with regard to the all too common issue of whether or not your workers are properly classified under the law. We will provide "red flags" that are often key to the final determination of Department of Labor, and how to address them.

Earlier this year, on February 1^st, the United States Department of Labor announced that its Wage and Hour Division was going to hire 100 additional investigators to support its enforcement efforts, including the protection of workers' wages, migrant and seasonal workers, rights to family medical leave, and prevailing wage requirements for workers on federal contracts, such as the Service Contract Act and Davis-Bacon. In the fiscal year 2021, the Wage and Hour Division collected $230 million in wages owed to 190,000 workers. As part of this initiative, the Department of Labor's Wage and Hour Division continues to focus on ensuring that workers are properly classified as employees versus independent contractors or consultants.

The misclassification of workers as 1099 contractors or consultants versus W-2 employees is an ongoing problem under federal and state laws. How to ensure proper classification has been a debate that spans past and current administrations. In fact, I have addressed this debate in several past articles.

In this video and article, we will listen in on a mock investigation of an investigator from the Department of Labor who is interviewing a representative of a fictitious company we will call Acme Enterprise Inc. The investigators' questions are some of the standard ones that are asked during audits by the Federal Department of Labor and State Departments of Labor.

Thank you for providing the records requested in our letter to you. For purposes of this audit, we are only focused on 2021.

What is your name and position?

My name is John Martin, and I am the comptroller for Acme Enterprises Incorporated.

I need to follow up on a few issues I have related to the documents you provided. In particular, I have questions about Mr. Joe Smith, who was listed as a 1099 contractor in your 2021 records. What services did Mr. Smith provide to Acme in 2021?

Yes, Mr. Smith is an independent contractor who does work for us. He performed engineering services in 2021 for our customer under one of our government contracts.

Were the services he provided in 2021 similar to or outside of the scope of the services typically provided to your company?

We have several employees who actually do perform the same services for our customer as Mr. Smith. However, Mr. Smith prefers to work as an outside slash independent consultant as he is semi-retired and does not need benefits.

Unfortunately, government agencies do not care what Mr. Smith or workers prefer. If he is performing pretty much the same services as your other employees rather than a service that your company doesn't even offer, then the auditors are likely to find that Mr. Smith is your employee, and they would reclassify him as such.

Does Mr. Smith have his own business set up to provide services such as those he provided to your company?

I don't know.

Do you know whether Mr. Smith has a business license or a company EIN employer identification number?

I do not know if Mr. Smith has a business license, but he did not use an EIN number for his work with us. He uses his social security number for us to pay him.

Did Mr. Smith provide his own equipment, supplies, and materials?

No, we issued him a laptop for him to use to perform his work for our customer. He does use his own cell phone, though.

Do you know whether Mr. Smith advertises his services to the public, such as through a website, or whether he has business cards with his logo?

I have no idea.

Auditors from the federal and state departments of labor really like to see workers who have been classified as 1099 contractors with their own business set up. They'll ask questions such as those we've gone over here as well as do they provide the same or similar services to other customers or is your company the only company that they work for providing these services. Each of these questions alone may not be dispositive to the auditor's decision as to whether Mr. Smith is an independent contractor or should be reclassified as your employee, but one that they seem to really focus on is the question of whether they use their EIN or their social security number in order for you to pay them.

Did Mr. Smith set his own hours and rates when he performed these services in 2021?

Please see Part 2 of this video and article for the remainder of the mock investigation.