As an employer, it’s critical to stay informed about changes in regulations that impact how you classify workers.
The U.S. Department of Labor has updated the rules regarding independent contractor classification. The traditional tests used to classify independent contractors versus employees are no longer valid, requiring a shift in how you approach this distinction when hiring.
For years, many employers have grappled with the blurred line between independent contractors and employees. Misclassifying workers can lead to significant legal and financial consequences for your business.
The DOL released a comprehensive six-part test to assist you in correctly classifying workers as either independent contractors or employees. Here’s a brief overview:
- Is the work vital to your business? If the worker’s role impacts the core operations of the business, they’re likely economically dependent on the employer. On the other hand, the work of an independent contractor is usually inessential to the organization.
- Does the worker’s managerial skill affect their opportunity for profit or loss? An independent contractor can experience both profit and loss based on their managerial decisions, such as hiring, purchasing and marketing. In contrast, an employee’s ability to earn more money is not tied to their managerial skills.
- How does the worker’s relative investment compare to your investment? Independent contractors typically make investments that contribute to the growth and success of the business, while an employee’s investment is usually minimal compared to the employer’s.
- Does the work require special skill and initiative? A worker’s business skills and initiative play a role in determining their economic independence. But having specialized skills alone does not automatically classify a worker as an independent contractor.
- Is the relationship permanent or indefinite? If the worker’s association is ongoing or indefinite, they’re likely an employee. Independent contractors work on a project basis.
- What is the degree of your control as the employer? The level of control exerted by the employer is a key factor in determining the worker’s economic dependence. Independent contractors have more autonomy over their work, while stringent control over a worker’s job schedules and tasks indicates an employer-employee relationship.
Implications for employers
It’s essential to review and update your current practices and contracts to ensure compliance with the updated classification criteria. This includes outlining the scope of work, payment terms and the level of control exerted over the contractor.
By keeping detailed records, you can demonstrate compliance in the event of an audit or legal dispute. The U.S. Department of Labor requires employers to maintain careful documentation for each exempt and independent contractor hired including:
- Forms signed by independent contractors acknowledging their classification
- A copy of contract between the employer and the independent contractor
- Copies of any licenses or registrations held by the independent contractor
Taking a proactive approach
While the new regulations may require adjustments to your current practices, they also present an opportunity to ensure fair treatment of all workers and uphold the integrity of your business.
If you’re looking for guidance regarding your employee classifications or business structure, reach out to our business advisory team– we’re here to help.
