Soon, it will be harder for businesses to classify workers as independent contractors.
Under the Department of Labor, the administration revoked a rule allowing businesses to classify workers as independent contractors. Instead, businesses might be forced to follow an outdated standard that will likely result in more workers being classified as employees.
Here are a few things you need to be aware of before this rule takes effect.
A Shift in the Playing Field
Under the new rule, there will be a focus on total circumstances to decide if a worker is classified as an independent contractor or employee.
In comparison, the previous rule weighed five main factors: the nature and degree of the individual’s control over work, the opportunity for profit or loss, the amount of skill required, the permanence of the working relationship, and whether the work is integral to production.
Previously, there was more emphasis on the first two points—the nature of an individual’s control over work and the opportunity for profit or loss. However, this is all changing for businesses.
More Classified Employees
The new rule no longer emphasizes control and opportunity for profit or loss. Instead, the total circumstance is considered, and no specific factor makes more of a difference.
The six factors in the rule are: a worker’s opportunity for profit or loss depending on managerial skill, the investment a worker has made in comparison to investments made by the potential employer, permanency of the worker’s relationship with the potential employer, degree of the potential employer’s control, if the work performed is an integral part of the potential employer’s business, and if a worker uses specialized skills indicative of business-like initiative.
State Rules are Still In Effect
It’s important to note that this new DOL rule affects the Fair Labor Standards Acts, but many states still have their own tests that are applicable.
Some states have laws that can protect independent contractors’ relationships, while others make it more difficult to establish that relationship. For instance, states like California and New Jersey are more strict.
They follow an ABC test. Under this test, a worker is considered an employee unless the worker is free from the control of their hirer in connection to performance, the worker does work beyond the usual hirer’s business, and the worker is engaged in independent trade/occupation/business that is the same as the work performed for hire. This test makes it much harder for workers to be treated as independent contractors.
An Increased Liability Risk
Employees are entitled to certain benefits under federal wage and hour laws. For example, minimum wage and overtime pay. However, this isn’t a benefit given to independent contractors—it’s not required.
Therefore, once this rule comes into effect, the risk of liability will increase tremendously. If businesses don’t give these benefits to their workers—who used to be classified as contractors but are now employees—there could be lawsuits, settlement demands, penalties, and so much more.
Steps You Should Take
There are risks for businesses that rely on independent contractors. They will face classification challenges and should take steps to avoid misclassification.
An action your business should take is conducting audits. This will help assess potential misclassification risks and determine any changes that might occur. Also, review and update policies and procedures to meet the new DOL rule. Furthermore, take this opportunity to train managers on navigating these potential changes. And because this new classification can be complex, consider working with experienced counsel to help evaluate all risks.
This will help your business be prepared for what’s to come.