The U.S. Department of Labor (DOL) says it believes employers are abusing the classification of independent contractor. To collect withholding taxes from employees going forward may be closer to the government's real objective.

That's why states are cooperating. In fact, 13 states and the District of Columbia have joined with the DOL in this struggle with similar motives about collecting withholding taxes from employees. The Internal Revenue Service is also part of that alliance. The effort has been going on for a long time, but it came to a halt sometime in March 2012 and stayed dormant during the seemingly endless presidential election period. Nor has it made much progress since.

A year or 2 ago, the DOL was calling the initiative the "Right to Know" and charging employers with the task of fully informing workers about their status—as employees or independent contractors. John Thompson, a partner in the Atlanta office of labor and employment firm Fisher & Phillips, tells us that a couple of years ago, employers and management attorneys tended to ask the DOL whether it was also (or more) interested in whether employees were properly classified as exempt or nonexempt.

But the picture seems to be getting murkier rather than clearer: The DOL has still not formally proposed regulations for either type of classification distinction, and its rhetoric at meetings on the topics, Thompson reports, has become vaguer. Clearly, though, the department's emphasis is still on the contractor-vs.-employee issue.

Classification is burdened with complexity. It might wish it to be much easier to tell whether a worker should be hired as an employee or a contractor, but it's not. For example, there's DOL's so-called "economic realities" test, with our parenthetical add-ons indicating a contractor relationship:

1. The degree to which the person's work is controlled by the organization (the less the better);
2. The person's investment in facilities and equipment, if any (the more the better);
3. The person's opportunities for profit or loss, if any (the more the better);
4. The amount of any initiative, judgment, or forethought the person uses in open-market competition (more is better);
5. The permanency of the relationship (shorter is better); and
6. Whether and to what extent the individual's work is an integral part of the organization's business or activities (the less so the better).

Not one of these factors is more important than any other, and the answer can not only be interpreted differently by different evaluators but also falls somewhere on a continuum from clear independence on one end to obvious employment on the other end.

As if this DOL test weren't enough, there are more: Some states and municipalities have laws that relate. The Internal Revenue Service offers tax laws, and courts and other jurisdictions offer their own standards. Says Thompson, "The whole issue of who is and is not an independent contractor will continue to be argued for a long time to come."

What about exempt/nonexempt? Leaving contractors aside for a moment, whether employers are properly classifying employees is an important question under the Fair Labor Standards Act (FLSA). Here, too, regulations can vary from one jurisdiction to the next and be confusing even within a single jurisdiction. DOL's regulations are sometimes ambiguous, and the FLSA sets no particular limitation on the amount of nonexempt work an exempt employee can perform before his or her exempt status is threatened.

Some states, says Thompson, limit the amount to 20 percent of the employee's time—such as for store managers in retail outlets like fast food or convenience stores—. But by straightening shelves, a manager might glean valuable information about what's selling, what's not, and what needs to be reordered.

In general, Thompson comments, this is a gray area, too, but plaintiffs' attorneys are more likely to go after the contractor-vs.-employee issue because such cases are more numerous than those of exempt-vs.-nonexempt employees. And, in the contractor issue, penalties can be steep. During 2012, for example, a Texas employer was assessed $105,000 in overtime pay for nonexempt employees it had treated as contractors, while a Virginia employer had to pay $101,000 to workers on a government construction project that it had wrongly designated to be subcontractors.

Get ready now to comment on the proposed regulations that the DOL intends to issue. It's almost certain they will involve the contractor-vs.-employee topic, and the DOL will want to know precisely how you have decided which individuals that work for you are independent contractors.

Thompson thinks it's important for employers to be prepared and to be clear and vocal in their comments on the regulations. For example, he fears the DOL will try to invade the area of attorney/client privilege to find out whether your attorney advised you to classify someone as a contractor and why. Meanwhile, he advises you to review the laws and existing regulations on classification and know where you stand.