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Subcontractors FLSA – Department of Labor v IRS


Department of Labor v IRS – Subcontractors FLSA

IRS guide to subcontractors FLSA vs Department of Labor. The FLSA (Fair Labor Standards Act) was enumerated by the Department of Labor’s (DOL)) interpretation of  recent Supreme Court decisions.

We received two emails on Monday with questions on how to determine the status of  (what the employer thought were)  subcontractors.

United States Of America Department Of Labor Subcontractors FLSA Logo
Wikipedia commons – U.S. Department of Labor

The DOL under the FLSA basically says the Supreme Court did not have a “one-size-fits-all” definition of  whether a worker or group of workers are to be considered employees or a contractor.

After reading the DOL’s interpretation, one may want to look to the IRS for a better explanation and definition of a subcontractor.

The bottom line of analyzing the employment situation “is to determine the underlying economic reality of the situation and whether the individual is economically dependent on the supposed employer.”  – Subcontractors are in a way economically dependent on their contractor so this is confusing.

The factors that the Supreme Court has considered significant, although no single one is regarded as controlling are:

(1) the extent to which the worker’s services are an integral part of the employer’s business (examples: Does the worker play an integral role in the business by performing the primary type of work that the employer performs for his customers or clients? Does the worker perform a discrete job that is one part of the business’ overall process of production? Does the worker supervise any of the company’s employees?);   This one, after reading it many times, kind of makes sense. 

USA Supreme Court Subcontractors FLSA Building
Wikimedia commons – Carol M. Highsmith

(2) the permanency of the relationship (example: How long has the worker worked for the same company?);  – I have known subcontractors that worked for their contractors for 30+ years. 

(3) the amount of the worker’s investment in facilities and equipment (examples: Is the worker reimbursed for any purchases or materials, supplies, etc.? Does the worker use his or her own tools or equipment?); – There are many contractors that charge some of their materials back to the contractor. 

(4) the nature and degree of control by the principal (examples: Who decides on what hours to be worked? Who is responsible for quality control? Does the worker work for any other company(s)? Who sets the pay rate?);    The IRS also lists this one in their advice on subcontractor/employee determination.

(5) the worker’s opportunities for profit and loss (examples: Did the worker make any investments such as insurance or bonding? Can the worker earn a profit by performing the job more efficiently or exercising managerial skill or suffer a loss of capital investment?); and    Certificates of insurance would take care of this one.

(6) the level of skill required in performing the job and the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise (examples: Does the worker perform routine tasks requiring little training? Does the worker advertise independently via yellow pages, business cards, etc.? Does the worker have a separate business site?).    This one makes sense.

The FSLA decision and the DOL‘s interpretation does make sense of what can be a very confusing matter.    Four of the six in the list do make sense.

Two Employee Subcontractors FLSA Shaking Hands

One area that seems to be the most confusing is the long-term business relationship  between a contractor and subcontractor.   The above list seems to hint at the longer the relationship, the more likely the contractor is actually an employee.

The amount of control of the contractor over the subcontractor would seem to be the most important factor.    

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James J Moore - Workers Comp Expert

Raleigh, NC, United States

About The Author...

James founded a Workers’ Compensation consulting firm, J&L Risk Management Consultants, Inc. in 1996. J&L’s mission is to reduce our clients’ Workers Compensation premiums by using time-tested techniques. J&L’s claims, premium, reserve and Experience Mod reviews have saved employers over $9.8 million in earned premiums over the last three years. J&L has saved numerous companies from bankruptcy proceedings as a result of insurance overpayments.

James has over 27 years of experience in insurance claims, audit, and underwriting, specializing in Workers’ Compensation. He has supervised, and managed the administration of Workers’ Compensation claims, and underwriting in over 45 states. His professional experience includes being the Director of Risk Management for the North Carolina School Boards Association. He created a very successful Workers’ Compensation Injury Rehabilitation Unit for school personnel.

James’s educational background, which centered on computer technology, culminated in earning a Masters of Business Administration (MBA); an Associate in Claims designation (AIC); and an Associate in Risk Management designation (ARM). He is a Chartered Financial Consultant (ChFC) and a licensed financial advisor. The NC Department of Insurance has certified him as an insurance instructor. He also possesses a Bachelors’ Degree in Actuarial Science.

LexisNexis has twice recognized his blog as one of the Top 25 Blogs on Workers’ Compensation. J&L has been listed in AM Best’s Preferred Providers Directory for Insurance Experts – Workers Compensation for over eight years. He recently won the prestigious Baucom Shine Lifetime Achievement Award for his volunteer contributions to the area of risk management and safety. James was recently named as an instructor for the prestigious Insurance Academy.

James is on the Board of Directors and Treasurer of the North Carolina Mid-State Safety Council. He has published two manuals on Workers’ Compensation and three different claims processing manuals. He has also written and has been quoted in numerous articles on reducing Workers’ Compensation costs for public and private employers. James publishes a weekly newsletter with 7,000 readers.

He currently possess press credentials and am invited to various national Workers Compensation conferences as a reporter.

James’s articles or interviews on Workers’ Compensation have appeared in the following publications or websites:

  • Risk and Insurance Management Society (RIMS)
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  • Bloomberg Business News
  • WorkCompCentral.com
  • Claims Magazine
  • Risk & Insurance Magazine
  • Insurance Journal
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