Most Americans who hold jobs are employees of the companies they work for. Yet businesses, including many construction firms, are increasingly misclassifying those employees as "independent contractors," according to new guidance on the issue from the U.S. Department of Labor.

In a memo last week, David Weil, administrator of DOL's Wage and Hour Division, said the agency is receiving more complaints from workers who say they are misclassified, especially as states have begun to address the issue locally with stepped-up investigations into alleged abuses and new laws that impose strict penalties on offenders.

Employees who are misclassified as independent contractors can miss out on workplace protections like minimum wage, overtime pay and unemployment benefits. At the same time, employers who incorrectly designate employees as independent contractors save money on payroll taxes. As a result, while some businesses inadvertently misclassify their employees, others do it deliberately.

The federal government and some states have cracked down on offenders, imposing steep fines.

Weil’s memo, he wrote, is an effort to clarify the DOL's distinction between employees and independent contractors.

What has changed

The memo does not change any laws or requirements; rather, it is meant to clarify that the DOL does not rely on "common law" — which is based on a historical practice and understanding of how to classify employees. Instead, the agency favors a six-pronged "economic realities" test, which the government uses to determine whether a worker is economically dependent on the employer or is self-employed.

Weil pointed out that no single factor determines whether a worker is an employee or an independent contractor. Instead, employers — like the government — should take all six into account when making that call.

6 factors to consider

1. Is the work an integral part of the employer's business?

If so, the person performing that work is more likely to be economically dependent on the employer, which could mean that worker is an employee and not an independent contractor, the memo pointed out.

Weil used construction as an example to explain this factor in determining whether someone is an employee or an independent contractor: Carpenters, he said, are integral to a homebuilder's business, which includes framing homes, so they might reasonably be considered employees of the company.

On the other hand, the developer of the software the builder uses to schedule jobs and track orders is not integral to the construction firm's business and is likely an independent contractor.

2. Does the worker's managerial skill affect the worker's opportunity for profit or loss?

An independent contractor's livelihood can swim or sink based on his or her management abilities. Skills in marketing, hiring, purchasing and time management help the contractor secure future business and run a profitable shop.

But on a job site, if the worker's managerial skills are not in play when it comes to how much money he or she earns, then that worker might qualify as an employee. For example, a worker with no say regarding how many hours to work or which jobs to perform doesn't exercise managerial skills.

3. How does the worker's relative investment compare to the employer’s investment?

A worker who has some skin in the game is far more likely to be considered an independent contractor than one who has not paid or risked anything in order to have the job, according to the DOL memo.

Buying his or her own tools and equipment, however, might not be enough to qualify someone as an independent contractor, especially if those tools are needed only for the work to be performed for a specific company.

But if the worker has made an investment that is "significant in nature and magnitude relative to the employer's investment in its overall business," that could justify an independent contractor classification, the memo said. That might include an investment in equipment that the contractor uses on various job sites and stores at a site the contractor pays for.

4. Does the work performed require special skill and initiative?

If business skills, judgment and initiative — and not just technical know-how — are in play, that could move a contractor closer to "independent" status, according to Weil.

Having a special technical skill, or having one that traditionally is associated with independent contractors, is not enough for the "independent" classification, he wrote.

Weil used another construction scenario to illustrate this factor: If a carpenter uses the specialized skills of his craft on a job but does not decide when or where the work is done, order materials, or choose which job to bid on next, for example, he probably is not an independent contractor.

The carpenter who custom-crafts cabinets for multiple construction firms, markets his services, orders the materials, and chooses which orders to fill and which to pass on, though, is exercising skills common to independent contractors.

5. Is the relationship between the worker and the employer permanent or indefinite?

A permanent arrangement with a single employer suggests that the worker is an employee; independent contractors typically work for multiple clients, the memo noted.

Even teleworkers or field staff — who order their own days and work off-site — are considered employees if they report to a single employer. But even a temporary employment arrangement doesn’t automatically make a worker independent.

Again, the worker’s own initiative is a key factor. If the worker does jobs only for one company, does the work according to instructions from the employer, and uses the firm’s equipment, the worker most likely is an employee and not an independent contractor.

6. What is the nature and degree of the employer's control?

"The 'control' factor should not play an oversized role in the analysis of whether a worker is an employer or an independent contractor," Weil noted. Still, it’s one factor in making the determination.

If workers are financially dependent on the employer and fall under the other criteria for an "employee" classification, and the employer exercises "meaningful aspects of the work performed," then the government will probably consider that worker an employee.