How To Make Money As A Contractor – A record number of employees were wrongly classified as “independent contractors” while employers stole millions of overtime pay out of their pockets.
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How To Make Money As A Contractor
It might seem like an obvious question, but it’s one the Labor Department has been trying to answer for years.
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An epidemic of employee misclassification has hit the heart of U.S. employment, leaving thousands of workers in a legal gray area. For decades, companies large and small have mislabeled their employees as “independent contractors.” But a new generation of “sharing economy” companies like Uber and Caviar have made it more important than ever to define what an independent contractor is.
Employers who misclassify workers get rich through lower taxes, while genuine workers lose the minimum wage and overtime protections guaranteed by the Fair Labor Standards Act.
The new Department of Labor guidance, Administrative Interpretation No. 2015-1, significantly expands the definition of “employee” and limits the category of “independent contractor,” meaning that most workers will now be clearly classified as employees.
But there will still be independent contractors, just not as many. And with “employee” status guaranteeing you at least $7.25 an hour and working a half hour over 40 hours, knowing what is and isn’t an independent contractor has never been more important.
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The DOL’s new guidance on distinguishing between employees and independent contractors boils down to one thing: true financial independence.
The basic question to ask is, are you financially dependent on your employer and its business, or are you effectively self-employed and are you doing business for yourself?
According to this common law theory, employers tell employees what to do, when, where and how to do it. Their employment activities are effectively “controlled” by the employer.
But in drafting the Fair Labor Standards Act, Congress rejected “control” of employment models. The law passed in 1947 used a broader definition: an employee is anyone who is “suffered or permitted to work” by the employer.
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According to the Department of Labor, “Subject to or permitted to work […] means that if an employer requires or permits an employee to work, they are hired, and the time spent may be work time.”
This “permission” is crucial. Contrary to the “control” principle, your employer doesn’t need to tell you exactly what to do or where to go in order for you to be an employee.
On the one hand, this definition means that if the employer doesn’t want you to work overtime, it’s the employer’s burden to make sure you don’t. But “suffer or allow work” also reflects the Labor Department’s new directive on defining employees, simply because it’s too broad. In fact, the definition of employment is intended to be as broad as possible to cover as many FLSA-protected workers as possible.
Given this broad definition of employment, we can turn to what really defines “employee” in the FLSA: economic reality.
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Here, what matters is reality, not what we say. Your position cannot tell you whether you are an independent contractor. Only the reality of the work you do can do this.
In its new document, the DOL explains a six-part test that can help you determine whether you are financially dependent on your employer and therefore an employee, or do business for yourself, an independent contractor .
The more dependent employers are on your workforce, the more likely you are to be financially dependent on them. At least that’s the logic behind the first question.
In the words of the Department of Labor, “True independent contractor work […] is unlikely to be part of the employer’s business.”
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A construction company specializes in building houses. Clearly, the carpenter is an integral part of building these frameworks, and therefore an integral part of the company’s business. Any carpenter who works on projects for the company may be classified as an employee.
But suppose the same construction company contracts a software developer and asks her to design a program that can help track lumber orders and schedule workers. Is she an employee? maybe not. While tracking orders and scheduling more efficiently will certainly improve a company’s operations, it’s not an integral part of the business, which is still the framework.
Workers can be integral but still interchangeable. In a call center that employs thousands of different customer service representatives who basically do the same thing, each representative is considered “indispensable” because the company handles the phone business itself.
A big part of being financially independent and being an independent contractor is that your decisions affect whether you make money or lose money. But this criterion also applies to many employees: employees who choose to work more hours and make more money as a result are still employees.
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Administrative activities include hiring other workers to help you with your work, purchasing equipment and advertising your services. Many true independent contractors basically run their own business, negotiating contracts and finding new clients.
But more importantly, how well you do these things can affect your chances of profiting or suffering losses.
By carefully choosing the materials you buy for your project, you can spend less and make a bigger profit. By the same token, if you do well and have a low budget, your current customers may recommend your services to others, increasing your chances of future monetization. At the same time, if you don’t do well now, you risk losing future opportunities.
It’s a loss of investment, maybe time, maybe capital, not wages. Employees may lose opportunities to earn more wages due to poor work and reduced hours, but they are still employees.
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Are you investing as much or close to as much in the project as the people who hire you? Have you invested heavily in your profit or loss opportunities other than this particular project? If so, you may be an independent contractor.
Purchasing tools is one of the most common reasons for misclassifying employees as independent contractors, and that’s not enough. Here’s another example from the Department of Labor:
A worker cleans for a local cleaning company. Every year, he receives a Form 1099 and his contract classifies him as an independent contractor. But the cleaning company has bought the company van he drives to work, insurance and pretty much all the equipment he uses. Sometimes he likes to bring special cleaning supplies to work, but usually, he doesn’t.
Obviously, the investment of cleaners is extremely small compared to the investment of cleaning companies. He is most likely an employee.
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Another cleaner bought her own van for work trips, had all the cleaning supplies available for cleaning, advertised her services to new clients, and even hired extra helpers for big jobs. Sometimes, she works for another cleaning company, but she’s also out there trying to get her own business.
Compared with the cleaning company where she occasionally works, Erfangjie has also made a similar investment. She may be an independent contractor.
In this question, we’re really talking about business skills, not technical skills. Carpenters and electricians, while certainly skilled and often classified as independent contractors, may not exercise independent judgment and initiative in their work.
In other words, providing skilled labor to your employer is not enough to make you an independent contractor. It’s more about getting from this job to the next.
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A man provides services to a construction company, but his skills are not really used in an independent way. On the job site, he makes decisions based on the task at hand, but he doesn’t think about ordering new materials or scheduling the next project. His employer told him when to show up and what to do when he got there. He is most likely an employee.
Another carpenter makes custom cabinets for several local construction companies. But his real business skills come in handy when he needs to decide which orders to fill first, when to buy new materials, and how best to market his skills to potential clients. He may be an independent contractor.
Workers who stayed with the same employer before quitting or being fired are likely to be employees. Independent contractors, on the other hand, often want a clear end to the working relationship as they are looking for their next client.
Some industries lack inherent persistence. Agribusinesses rely on seasonal workers, many of whom are migrants, moving from one part of the country to another. But that doesn’t necessarily make them independent contractors, as their movement is inherent in the nature of farm labor.
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If you are an independent contractor, the lack of durability in your working relationship is due to your own business initiative.
Do you control meaningful aspects of the work you do? Do you have enough control over what you do and how you do it that others will think you are running your own business? If yes, you may be an independent contractor.
But it doesn’t really matter where
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