If your company relies on independent contractors, you may be concerned about ongoing developments in how they are classified. Should your contractors be considered employees?
The difference could be substantial. Independent contractors are not eligible for many workplace benefits and protections, including:
- Minimum wage and overtime premium
- Employer-paid half of payroll taxes
- Unemployment insurance
- Workers’ compensation
- Reimbursement of employment-related expenses
- Employer-paid benefits such as health insurance
The classification of workers is statutory. You do not have the option of choosing who is a contractor vs. an employee. Which classification applies depends on the federal Fair Labor Standards Act (FLSA).
If you misclassify workers as contractors instead of employees, you could be liable for back taxes and benefits.
In an ongoing effort to promote clarity, the Department of Labor has just issued a new rule on how to classify workers. This is especially important during the growth of the “gig economy,” because many companies in the gig economy rely almost entirely on contractors as part of their business model.
The new rule would replace the current standard with an “economic reality test.” The basic idea is that the Labor Department will look at the economic realities of the situation to determine whether the worker is in business for him/herself, or whether they are economically dependent on the company for their work.
Proposed rule still weighs the worker’s degree of control
When determining whether a worker is actually self-employed, the department would consider two core factors:
- The degree and nature of the worker’s control over the performance of the work
- What opportunity the worker has for profiting based on investment or initiative
Additionally, the department would take three other factors into account, although the two core factors would receive greater weight. The additional factors are:
- The skill level required for the work
- The permanence of the relationship between the worker and company
- Whether the work is part of an integrated production unit
First, the more control the worker has over the performance of the work, the more likely the worker is to be considered an independent contractor. Key aspects of the work under control include things like setting the work schedule, choosing assignments, the degree of supervision, and the worker’s ability to work for other companies, including competitors.
One area where the proposed rule differs from the existing weight of factors is that it specifies that requiring the worker to comply with certain requirements does not constitute control over the performance of the work.
For example, a company can require workers to carry insurance, meet deadlines or satisfy typical terms of a contract without being considered to be in control of the performance of the work.
Second, if the worker has a significant chance to increase their earnings through investment or initiative, that worker is probably a contractor. This includes the exercise of managerial skill or business acumen and the management of investments, for example.
The three additional factors to be weighed are intended to “sharpen the distinction between the economic reality factors.” The idea is to use the skill level of the job, rather than the aspects of control, to determine proper classification.
Additionally, the permanence and “integrated production unit” aspects of the rule favor classification as an employee when the work is continuous and indefinite in duration, and where the work process requires coordination between interdependent workers.
Ultimately, the proposed rule relies on weighing various factors, just as the current rule does. When it comes to employee classification, there would still be no simple answers.