Employee or contractor? Labor Department seeks to clarify rules

When are workers employees? When are they contractors?

The Labor Department issued new guidance Wednesday intended to help companies answer that increasingly fraught question. The issue has taken on greater urgency with the growth of sharing-economy firms such as Uber and TaskRabbit, which increasingly rely on independent workers, often for short-term projects.

The department’s directive emphasizes that a worker who is “economically dependent” on the employer should be treated as an employee. By contrast, a worker must be in business for themselves to be an independent contractor.

The guidance could make it harder for companies to use contractors, labor law experts say. It comes amid a wave of lawsuits against companies such as FedEx, ride-hailing service Lyft and online cleaning service provider Handy, brought by workers who say they should have been treated as employees rather than contractors.

“The pendulum is swinging away from classifying workers as contractors and toward employees,” said Michael Droke, an employment law partner at Dorsey and Whitney. “Employers should be more cautious in identifying workers as contractors.”

Labor unions and activists have for years argued that companies in many industries — construction, hotels and janitorial services, among others — have sought to hold down labor costs by calling workers independent contractors. Contractors aren’t eligible for overtime pay, unemployment insurance or workers’ compensation. They typically pay all their Social Security taxes, compared with employees, who split that cost with employers.

The guidelines don’t represent new regulations, but clarify how Labor officials think companies and courts should interpret the rules.

The move comes as the department steps up its enforcement of classification rules. Last year, it forced companies to pay $79 million in back wages to 109,000 workers in the janitorial, temporary help, food services, day care and hotel industries.