Businesses operating in or expanding to the US, including those from Ireland and Northern Ireland, use independent contractors to avoid some of the baggage associated with the employer/employee relationship under US law. The use of independent contractors recently has gotten more complicated due to the US Department of Labor’s publication of Administrator’s Interpretation 2015-1. The Interpretation is part of the Department’s closer monitoring of the ‘independent contractor’ designation. Businesses from Ireland or Northern Ireland operating in or expanding to the US, and using the services of an independent contractor (such as a sales agent) should take another look at how they designate a person as an ‘independent contractor,’ as soon as possible.
In the past–and this is a bit of an oversimplification–businesses that did not control a person’s hours or the manner in which that person performed ‘work’ duties reasonably would classify that person as an independent contractor. This control factor was the single most important factor in determining whether a person was properly classified as an independent contractor. In the US, independent contractors are not covered by, and do not benefit from, regulations (i) setting minimum wage and overtime compensation; (ii) requiring the provision of unemployment insurance and workers’ compensation coverage; and (iii) requiring employer-funded social security and similar contributions. For Irish and Northern Irish companies, using an independent contractor instead of an employee also reduces the risk that the company would be construed as ‘doing business’ in a specific US state for court/legal jurisdictional purposes.
The Interpretation de-emphasizes the control factor, and emphasizes the multi-factor ‘economic realities’ test, a test that focuses on whether the worker is economically dependent on the employer. Some of the considerations in the ‘economic realities’ test include (i) the extent to which the work performed is an integral part of the employer’s business; (ii) the worker’s opportunity for profit or loss depending on his or her managerial skill; (iii) the extent of the relative investments of the employer and the worker; (iv) whether the work performed requires special skills and initiative; (v) the permanency of the relationship; and (vi) the degree of control exercised or retained by the employer. If a person is economically dependent on an employer, then that person should be classified as an employee–notwithstanding any title of, or content in, any contract.
Misclassifying a person as an independent contractor can generate significant, adverse financial consequences for the company. For Irish and Northern Irish companies, such a misclassification could also cause that company to be deemed to be doing business in one or more US states, along with tax, jurisdictional and other associated consequences. Bottom line–review your existing independent contractor agreements, and take care (with the help of a lawyer) in drafting new independent contractor agreements.