New DOL rules for independent contractors
We knew this was coming since 2021. After a lot of false starts and rewrites, the Dept of Labor Final Rules are finally out for what it takes to have an independent contractor in your business.
In fact, 1,741 pages of rules. Effective 3/11/2024, your independent contractor workers may be gone and replaced with newly minted employees, complete with payroll taxes, support, equipment, and a home office you pay for if they work from home.
How will this impact your business? Here's a quick summary of the Final Rule.
#1 Worker Can Use Managerial Skills for Profit or Loss
An Independent Contractor can use managerial skills to make more money.
#2 Worker and Potential Employer Investments
Who buys the tools of the trade and equipment for the worker? This one isn’t as clear-cut, but the bottom line is that an independent contractor usually furnishes their own tools and equipment.
#3 Work Relationship Permanence
An employee has an indefinite, continuous, or exclusive work. An independent contractor has a definite, non-exclusive, project-based, or sporadic relationship.
#4 Employer Control Over Work
This factor considers the potential employer’s control over work performance, scheduling, supervision, and limitations on working for others.
#5 Extent to Which Work Performed is Integral to Employer Business
Critical, necessary, or central work suggests employee status. Non-critical work indicates independent contractor status.
#6 Use of Worker Skill and Initiative
Dependence on employer training or lack of specialized skills suggests employee status.
*These were the core factors that were given more weight under the previous rule. The rule also indicates that additional factors could possibly be used in determining specific cases when they illustrate the economic dependence between a worker and potential employer.
There are several states that, in addition to the federal regulation, have state-specific rules on worker classification. For example, California, Illinois, Massachusetts, and New Jersey have an ABC test. Under these laws, a worker would be considered an employee unless all three facets are met.
An individual is free from control and direction regarding performance of work;
The work is performed outside the regular course of a business; and
An individual is engaged in an independently established business, trade, or occupation of the same nature as the work being performed (e.g., a landscaper hired by a company to do landscaping)
Under the rule, it is more likely that certain workers currently classified as independent contractors will need to be reclassified as employees and likely eligible for both minimum wage and overtime protections, as well as possibly eligible for employer benefits such as health coverage and/or retirement benefits.
A finding of misclassification can result in expensive penalties, such as unpaid overtime and minimum wage, liquidated damages and attorneys’ fees. The IRS can levy additional penalties for misclassification – including criminal charges – if the IRS suspects an employer intentionally misclassified its employees.
Employers should take precautions, such as consulting a checklist or structured guidelines each time they hire a new worker. Employers should also conduct routine checks to ensure that workers who they hired as independent contractors have not become employees over time due to a shift in the nature of their work. Employers should also recognize that it is not a defense to a misclassification claim that a worker requested to be treated as an independent contractor.
What does it mean if your workers become employees? How can you keep Independent Contractor status for your workers? These are the questions that every business owner is going to need to ask in 2024.