Navigating the New Rules: Protecting Your Business Under Stricter Independent Contractor Guidelines
Does your business rely on independent contractors? If so, heads up—the U.S. Department of Labor (DOL) is tightening the reins on how companies can classify workers as independent contractors. This change could impact your business model and costs in a big way.
Why the Crackdown?
The Department of Labor enforces the Fair Labor Standards Act (FLSA), the law that mandates minimum wage and overtime pay for employees. However, independent contractors aren’t covered under the FLSA, meaning they don’t need to be paid overtime or even minimum wage. This is a big reason many businesses prefer independent contractors over employees.
The problem? It’s getting harder to define who qualifies as an independent contractor. The Department of Labor’s new test is meant to clarify this, but it’s complex and full of gray areas.
Who Qualifies as an Independent Contractor?
While companies can initially decide how to classify workers, those decisions are subject to scrutiny by the DOL, IRS, and state agencies for unemployment and workers’ compensation. Misclassify a worker, and you could face serious consequences. If the government determines an employee was wrongly classified, you might be on the hook for up to three years of back overtime pay. Misclassification lawsuits can also crop up, adding to the financial burden.
The New DOL Test: Six Factors to Consider
Under the new DOL guidelines, companies must evaluate six factors to decide if a worker qualifies as an independent contractor:
Opportunity for Profit or Loss: Does the worker have a chance to earn profits or face losses based on their performance?
Investment in Facilities and Equipment: Has the worker made any financial investment in equipment or facilities?
Permanency of the Relationship: Is this an ongoing relationship or a one-time engagement?
Degree of Control by the Hiring Firm: How much control does the company have over the worker’s schedule, tasks, and methods?
Integration into the Business: Is the work integral to the company’s main operations?
Skill and Initiative Required: How specialized is the work, and does it require independent initiative?
No single factor holds all the weight. Instead, companies must look at the entire scope of the relationship.
Different Tests, Different Standards: A Complicated Landscape
Here’s where things get trickier. The DOL’s new test is just one of many used to determine worker classification. The IRS, for example, uses a separate “right-of-control” test, while many states have their own ABC test, often stricter than the DOL’s. This means a worker could be considered an independent contractor under the IRS but deemed an employee under DOL or state law.
What Should You Do Next?
If you use independent contractors, it’s critical to review these relationships with the new DOL guidelines in mind. And if your business relies heavily on contractors, it’s wise to have them sign an independent contractor agreement with a clause waiving the right to join class-action suits against your company. This could save you from potential class-action misclassification suits—an increasingly popular move among plaintiff’s attorneys.
Bottom Line: Take a Proactive Approach
The DOL’s stricter guidelines may create complications for businesses, but understanding and applying the new rules could help you avoid costly misclassification penalties. Take a proactive approach, review your contracts, and consult a tax or employment law professional to ensure you’re protected.
Schedule a consultation with our tax advisor for assistance with determining your workers classification.
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