Just as your Finance team got the hang of independent contractor classification, the Department of Labor (DOL) has published a Notice of Proposed Rulemaking that may make it harder to classify workers as independent contractors.
If finalized, the rule would rescind the 2021 independent contractor rule that says the top economic realities test considerations for determining independent contractor classification are the worker’s level of control over the work and the extent of the worker’s opportunity for profit or loss.
Under the new proposed rule, to determine whether workers are truly in business for themselves employers would need to give equal consideration to those two factors of the working relationship, plus:
- The worker’s investment in equipment or materials required for the task
- The degree of permanence of the working relationship
- The extent to which the work performed is an integral part of the employer’s business, and
- The degree of skill and initiative exhibited by the worker.
In a press release, the DOL said misclassification “allows certain employers to gain an unfair advantage over law-abiding businesses, and hurts the economy at-large” and that the rule is intended to align the department’s approach to independent contractor classification with recent federal court interpretations of the Fair Labor Standards Act.
“We have seen in many cases that employers misclassify their employees as independent contractors, particularly among our nation’s most vulnerable workers,” Secretary of Labor Marty Walsh said in the statement. “Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages.”
Public comment is being accepted through November 28, 2022 both online and in writing. Written comments should be mailed to: Division of Regulations, Legislation and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Ave. NW, Washington, DC 20210.
The National Retail Federation has voiced opposition to the proposed rule on its website, calling the more complicated legal analysis for determining independent contractor classification “unwarranted and unnecessary.”
“The changes being proposed by the Labor Department will significantly increase costs for businesses across all industries and further drive already-rampant inflation. This decision will only foster massive confusion, endless litigation, reduced innovation and fewer opportunities for employees and independent contractors alike,” the group said.
Other key worker classification standards
You may also have state and local labor laws to follow when it comes to employee/independent contractor classification. For example, California and Illinois use the ABC test, under which a worker is considered an employee unless the employer can prove:
- The worker isn’t under their control and direction
- The worker is performing work outside the usual course of their business, and
- The worker is engaged in an independently established trade, occupation or business.
Meanwhile, it’s also important to keep in mind the IRS has its own set of rules regarding worker classification.
Because the penalties for misclassifying a worker can get expensive, the bottom line is classifying a worker as an independent contractor has to pass all regulatory tests.