Where is a business supposed to draw the line between a traditional employee and an independent contractor hired by the company? Some say it’s a question of hours worked, or whether the position is project-based, while others claim it’s whatever the company and the worker agree to call it. In an effort to clarify the matter, the U.S. Dept. of Labor has chimed in with new guidance for employers.

The guidance [PDF] — essentially Labor’s interpretation of the Fair Labor Standards Act — comes amid growing debate about the pros and cons of the independent contractor model. Supporters of the idea argue that the flexibility of contractor arrangements allows “independent entrepreneurs” to flourish. Detractors claim that the companies are using contractors to cut down on labor costs.

According to the Dept. of Labor, the newly released guidance is meant to assist workers and employers in understanding current labor laws. The interpretation is modeled on tests that courts have used in the past to determine whether a worker is an employee or an independent contractor. Those examinations look at the “economic realities” surrounding an individual and those realities relationship to an employer.

Based on that approach, the Dept. contends that if a worker is “economically dependent” on the employer, that individual is considered an employee. If the person is in business for him or herself, they are an independent contractor.

“The Labor Department supports the use of legitimate independent contractors − who play an important role in our economy − but when employers deliberately misclassify employees in an attempt to cut costs, everyone loses,” the Dept. said in a statement.

The Dept. suggests that by following these guidelines and taking into account a worker’s economic situation, companies can avoid misclassifying workers and subsequent lawsuits, such as those faced in the past by Uber, FedEx and Google.

“Misclassification of employees as independent contractors is found in an increasing number of workplaces in the United States, in part reflecting larger restructuring of business organizations,” the guidance states. “When employers improperly classify employees as independent contractors, the employees may not receive important workplace protections such as the minimum wage, overtime compensation, unemployment insurance, and workers’ compensation.”

The memorandum offers several real-world examples that show how the distinction between a contractor and an employee can be murky.

For a construction company that frames residential homes, carpenters are integral to the employer’s business because the company is in business to frame homes, and carpentry is an integral part of providing that service.

In contrast, the same construction company may contract with a software developer to create software that, among other things, assists the company in tracking its bids, scheduling projects and crews, and tracking material orders. The software developer is performing work that is not integral to the construction company’s business, which is indicative of an independent contractor.

According to the AP, while the new guidance tries to simplify definitions for employers, it could make it more difficult for companies to use independent contractors.

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

Disputes over whether a worker is an independent contractor or an employee are a long-running issue in labor law in general. Companies that habitually do this and are sued by employees – or as companies refer to them as, freelancers.

The most recent case occurred just last month, when the California Labor Commission declared a former driver for Uber was considered an employee.

The decision, which applies only to the one specific driver, could have significant implications for the ride-sharing company and others.

For workers at Uber, Lyft, and similar services, the difference is a significant one. Being an independent contractor, as drivers are defined now, means that drivers are responsible for supplying their cars, maintaining the vehicles, and paying for gasoline. It also gives the companies a convenient shield when they’re accused of discriminating against disabled passengers: it’s the drivers who aren’t picking up service dogs; the app is just a ride-hailing platform and payment-processing service.

If drivers are found to be employees, as the driver in this case was, they would be entitled to have Uber pay their car expenses, as well as other costs that employers are supposed to cover. For all workers, that would include the employer’s portion of Social Security, worker’s compensation, unemployment insurance, and benefits like health insurance if the employee works full-time hours.

Employee or contractor? Labor Department seeks to clarify rules [The Associated Press]

Want more consumer news? Visit our parent organization, Consumer Reports, for the latest on scams, recalls, and other consumer issues.