The Department of Labor issued a final rule on January 6, clarifying the standards for determining whether a worker should be classified as an employee or an independent contractor. The future of the rule is uncertain, which complicates employers’ decisions about labor relations, pay scales, and benefits for workers. It also affects the taxes they pay and whether taxes need to be withheld from their paychecks or simply reported on a Form 1099.
The rule uses a simpler, shorter test for when a worker may be legally classified as an independent contractor vs. an employee, subject to minimum wage and overtime protections. In recent decades, more companies have classified workers as independent contractors to save on salaries and benefits. That trend has accelerated with the growth of the gig economy, where independent contractors are central to the business models of leading companies such as Uber, Lyft, Instacart, DoorDash, and others.
The final rule includes several clarifications:
- It reaffirms an “economic reality” test to determine whether individuals are in business for themselves (an independent contractor) or are economically dependent on the “employer” for work (an FLSA employee).
- It identifies two “core factors” that determine whether workers are economically dependent on someone else or are in business for themselves:
- The nature and degree of control over the work;
- The worker’s opportunity for profit or loss based on initiative and/or investment.
- It identifies three other factors that may help in the analysis, particularly when the two core factors do not point to the same classification:
- The amount of skill required for the work;
- How permanent is the working relationship between the worker and the potential employer;
- Whether the work is part of an integrated unit of production.
The rule also provides six fact-specific examples applying the factors, which the Wage and Hour Division believes provide greater clarity for the workforce.
The DOL rules on independent contractors are in addition to federal rules, including the IRS rules, and state law. The rules or laws that create the most protection for employees are the ones employers must follow.
Because the future of this rule is uncertain, we advise members to use the two core factors and secondary three factors as guidance in properly classifying their workers. Although it may not be necessary to make wholesale changes to your current classifications, we suggest that you review and be prepared to change your current classifications in light of this rule prior to filing your employment taxes. As always, Employers Council will watch for updates on this important potential change to the “independent contractor vs. employee” determination and keep you updated.