Regulations governing businesses tend to change; that is no secret. Advancements in industry best practices, resource allocation and political influence’s pendulum all impact how employees are hired and the ways employers are expected to manage their workforce.
With that in mind, employers must understand these regulations and ensure compliance supporting their employees and their bottom lines. We will look at six key distinctions dealerships must weigh to determine whether workers are independent contractors under the Department of Labor’s (DoL) updated Independent Contractor Rule.
Generally speaking, under the Rule, a classification as an Independent Contractor must meet all six criteria. However, each category may vary slightly.
The Worker’s Opportunity for Profit or Loss
The first factor to consider, according to the DOL, is whether the worker has “opportunities for profit or loss based on managerial skill that affect the worker’s economic success or failure.”
In plain language, the question is whether workers—mechanics, for example—can independently advertise their services to the general marketplace, set their own rates/fees, manage their own schedule, decline work when it’s offered and make supervisory decisions such as hiring additional workers.
For instance, mechanics who work in their own garages to fix vehicles for the local marketplace are more than likely independent contractors. The reason is that such mechanics have their own facilities, handle their own advertising, set their rates and invest in their own equipment and licensure/certifications. Moreover, they decide which vehicles to repair, when they work and whether they hire any additional help.
Each factor exhibits the “managerial skill” impacting a worker’s profit or loss.
Investments by the Worker and the Potential Employer
The second question the DoL guidance asks is: “Are any investments by a worker capital or entrepreneurial in nature?” In plain language, do workers spend their own money to increase their opportunities for work or lower the work costs they perform?
Ask yourself if your workers—say, someone you pay to complete a custom paint job on an RV—bring their own supplies and/or design decals or graphics on their own computer. If they do not, and instead use your dealership’s equipment and materials, they could possibly be classified as an employee.
If workers primarily use their own equipment, however, they are potentially independent contractors. Note, though, some individual states have additional regulations further influencing factors. In California, for instance, mechanics can be W-2 employees and use their own tools, but the employer has to pay them a higher minimum rate.
The Degree of Permanence of the Work Relationship
The third factor the DoL guidance outlines is whether “the work relationship is indefinite in duration, continuous or exclusive of work for other employers.”
Simply put, can workers reasonably expect ongoing employment at your dealership?
If they can, they are likely considered an employee. If their work is contracted only for a fixed period, or they work intermittently for multiple shops on various projects, they may be an independent contractor.
Nature and Degree of Potential Control Over the Work
The fourth question the DoL advises employers to consider is whether workers “have control over the performance of the work and the economic aspects of the working relationship.” The more control you exert, the greater the likelihood workers will be classified as employees rather than independent contractors.
In some ways, this combines the previous three questions. Your dealership may post weekly work schedules, conduct performance reviews, supervise work, set the rate customers pay for services and even require certain employees to sign noncompete agreements.
When workers perform under such constraints, they are considered employees.
The Extent to Which the Work is Integral to the Employer’s Business
The fifth consideration is evaluating the extent to which a worker’s job impacts your business. Here, the job function, rather than the individual worker, is the critical factor.
If your dealership’s principal business is vehicle sales, salespeople are obviously integral to your business. Custom design, however, is not core to vehicle sales. The workers who complete custom design work are more likely to be considered independent contractors.
Worker Skill or Initiative
Finally, consider whether workers use “specialized skills to perform the work” and whether “those skills contribute to business-like initiative.” To best navigate this guidance, ask whether workers have a specialized certification and whether they advertise that qualification to obtain further employment.
To be sure, specialized skills alone do not indicate independent contractor status. The focus shifts to how those skills are applied in connection to attracting new business opportunities. Consider whether workers take the initiative to apply their skills independently or apply them only at your dealership.
Comply With Guidance to Boost Bottom Line
Assessing the tasks, certifications, supervisory roles, financial responsibilities and specialized skills that help determine whether a worker is an independent contractor is time-consuming work. However, evaluating the nuances will prevent you from being fined.
- Misclassification may make you responsible for:
- Back taxes (plus additional penalties).
- Fines/penalties for not having workers covered by workers’ compensation insurance.
- Back pay and fines for unpaid wages (including overtime).
- Penalties for required state and federal employee forms and personnel/payroll records.
- Additionally, employers violating DoL guidance may expose themselves to possible discrimination, harassment or retaliation lawsuits.
The bottom line is to stay informed. Be proactive. View compliance as a strategic investment in your dealership business.
Russ Cole is a Human Resources Consultant at KPA. KPA provides compliance software and services for a wide range of businesses.
