Independent Contractor or Employee?

As a person who considers themselves to be among the ranks of the independent contractor or solopreneur population, both my clients and I have an interest in how to maintain that relationship legally. Indeed, I have at various times had to sever or refuse relationships with clients that wished to control me as an employee, while still paying me as an independent contractor.

In many cases, I have had a hard time explaining why and how I make that distinction. To many users of so-called freelancers, just the mere fact that their workers are offsite, or their services are covered by a contract is enough to justify 1099 status.

In all fairness to the client side of the equation, in many cases they truly believe that anyone not occupying a desk in their offices or who has signed a contract  is not an employee, particularly if they engage the contractors services through one of the many labor broker or middleman sites like Elance or other similar websites.

I, on the other hand, tend to define the relationship by how much autonomy I have to produce the deliverables that serve the purposes they want or need.

When I come across a client who actually advertises for a contractor on one of the middleman sites, or who after I contact them wants to work through one of those sites, the relationship becomes even more complicated than usual. 

Needless to say, that can create significant misunderstandings.

So, whenever a government agency takes a stab at clarifying the differences, I am interested.

On  July 15, 2015, the U.S. Department of Labor's (DOL)Wage and Hour Division issued an Administrators Interpretation, No. 2015-1 that for the first time seeks to clarify the distinctions used to determine the legal status of workers for employment classification purposes.

While declaring that the intent of the document is not to discourage people from being legitimate independent contractors, it nevertheless has an emphasis on attempting to crack down on misclassification of workers.

Interpretation 2015-1 relies heavily upon defining the somewhat ambiguous phrase "suffers or permits" in determining the relationship of workers to the people benefitting from their work.

By citing numerous examples of legal precedent, administrator David Weil seeks to explain the differences under consideration.

Among the many legal decisions cited, none directly address the proliferation of so-called labor brokers, specifically businesses which depend upon what could be termed "captive labor" i.e. people whose work product the business needs to control in order to earn revenue.

However, on pages 14 and 15 of the interpretation, the document does provide a hypothetical comparison of circumstances that approximates a common scenario found in the actual operational model  of  the labor brokerage business segment, as follows:

"Example: A registered nurse who provides skilled nursing care in nursing homes is listed with Beta Nurse Registry in order to be matched with clients. The registry interviewed the nurse prior to her joining the registry, and also required the nurse to undergo a multi-day training presented by Beta. Beta sends the nurse a listing each week with potential clients and requires the nurse to fill out a form with Beta prior to contacting any clients. Beta also requires that the nurse adhere to a certain wage range and the nurse cannot provide care during any weekend hours. The nurse must inform Beta if she is hired by a client and must contact Beta if she will miss scheduled work with any client. In this scenario, the degree of control exercised by the registry is indicative of an employment relationship.

Another registered nurse who provides skilled nursing care in nursing homes is listed with Jones Nurse Registry in order to be matched with clients. The registry sends the nurse a listing each week with potential clients. The nurse is free to call as many or as few potential clients as she wishes and to work for as many or as few as she wishes; the nurse also negotiates her own wage rate and schedule with the client. In this scenario, the degree of control exercised by the registry is not indicative of an employment relationship."

Whether this actually addresses the business practices of such examples as Upwork, Elance, ifreelance, Demand Media, Creative Circle or any other of the well-known middleman businesses currently in operation remains to be seen.

In another section of the document concerning the control of the worker by the other party to the relationship the document includes this citation:

"…see also Superior Care, 840 F.2d at 1060 (“An employer does not need to look over his workers’ shoulders every day in order to exercise control.”)

Also addressed in the administrative interpretation is whether the middleman or client's main business could exist without the exercise of control over the worker, i.e. is the "control" factor an integral part of the middleman or client's revenue from business operations.

In the case of those businesses that derive a significant portion of their income only if a worker produces a billable deliverable for the end buyer, that relationship becomes central to answering the question of whether the worker is in fact, an employee of the labor brokering business.

For the millions of freelance writers, coders, programmers, and others currently deriving the main portion of their income through their association with the many middleman websites, this document is not likely to fully answer their questions.

In my own case, I virtually quit even responding to clients that advertise for help on these sites, although several years ago I did have several wonderful clients that accessed my services in that way. 

At first glance, the document would tend to support the premise that most of the sites that control access to and/or place limitations or impose standards upon how or even whether workers can access clients, could be in for a rough ride.

For those needing a concrete real world  example of the differences addressed, sites like Elance.com and its corporate progeny, Upwork.com would seem more akin to the first example (Beta Nurse Registry) quoted above, while sites like flexjobs.com, craigslist.com or idealist.org more closely approximate the second scenario(Jones Nurse Registry), essentially providing the same service as the classified ads in your local newspaper.

Although the DOL is to be commended for trying to address this issue, the resulting document does little to provide absolute clarity for the millions of so-called freelancers, or the buyers of their services.

The actual status will probably be clarified on a case-by-case basis, only when someone or some group specifically asks for a ruling or files a legal action requesting clarification of employee status to obtain benefits or settle a tax question.

Another interesting thing to watch will be how the sites themselves react to this DOL paper.

Some already provide an option that allows contractors to request that jobs be re-classified as W-2 positions rather than 1099 arrangements, although the buyers are free to refuse. Others are creating subsets of what are essentially employee/employer relationships within the main corporate structure.

In the meantime, I will continue to structure my contracts so as to leave no doubt about my status.