The gig economy is ever-growing.

The tech industry in particular relies majorly on outside help for their projects.

Of course, from an employer POV - hiring someone on a contractor basis seems a better choice.

Mainly because of the reduced administrative and financial costs.

It may be tempting to just mention the “Independent Contractor” clause in their engagement agreements.

And then assume that the hired person is working for them as a contractor.

But sadly that’s not how the law works.

Where Mistakes Happen:

Different jurisdictions have different rules for companies.

Specifically for when companies can classify a new hire as an independent contractor vs. an employee.

The misclassification of workers as independent contractors rather than employees is a major problem.

And what happens due to this misclassification?

In the past businesses were subjected to heavy penalties for violation of tax laws, labor laws, and more.

In fact, recently, the US Labor Department came up with this new rule.

This new rule will force companies to treat some workers as employees rather than less expensive independent contractors.

The 6-Factor Test

Whether a worker should be classified as an employee or contractor will now depend on a holistic six-factor test:

1. Degree to which the employer controls how the work is done;

2. The worker’s opportunity for profit or loss;

3. The amount of skill required for the work;

4. Degree of permanence of the work relationship;

5. The worker’s investment in equipment or materials required for tasks; and

6. The extent to which the service rendered is an integral part of the employer’s business.

The inquiry should determine whether the worker is truly in business for themselves.

Or whether they are economically dependent upon the employer for work.

Also, with the new federal rule, the worker protection rules on the state level can’t be ignored either.

Remember that you can't simply enter into an agreement with a worker to classify them as an independent contractor.

And just assume you would avoid penalties under such federal standards.

The Department will look to the economic reality of the working relationship when determining whether a worker has been misclassified.

That's it!

If you are working in the US, make sure to follow that 6-factor test.

Because what you say on paper and what you do as practice shouldn't differ.

Good luck.

And if you want someone to protect your company, by guiding you on the legal side, pick a time here.

https://calendly.com/mtlegalteam/discovery-call-with-mtlegal-team

We can talk about how we can work together. 

Talk to you soon.

-- Akhil Mishra