A common question business owners ask is:

Do I classify a worker as an independent contractor or as an employee?

Filing workers as independent contractors will result in fewer taxes for the business. But, the consequences of making the wrong choice can be costly. More on that later.

The US Department of Labor (DOL) approved final rules that would have become effective on March 8, 2021. President Biden has placed a freeze on any Trump-era rules that have not gone into effect. A leader of a Biden-designated agency must review or approve the rule before its next steps. The delay lasts 60 days from January 20, approximately March 20, or longer.

Here’s the Rundown

Businesses are facing a variety of federal, state, and local laws. These laws govern how to determine employee or independent contractor status. When faced with these rules, which should we follow? Which are we subject to? How do we make the decision?

This new Department of Labor rule may be a game-changer for many.

DOL’s Rulemaking Proposes to:

1. Adopt an economic reality that considers whether a worker supports themselves or is dependent on an employer.

   
   

2. Identify and explain two “core factors” to determine if there is economic dependence. Specifically:

   a. the nature and degree of the worker’s control over the work; and

   b. the worker’s opportunity for profit or loss based on initiative and/or investment.
   

3. Identify three other factors that may serve as extra guideposts in the analysis. These include:

   a. the amount of skill required for the work;

   b. the degree of performance of the working relationship between the worker and the potential employer
   c. whether the work is part of an integrated unit of production; and
   

4. Advise that the essence and nature of the actual work are more relevant than what may be contractually written in determining whether a worker is an employee or an independent contractor. In other words, actions speak louder than words to the contrary.

A Closer Look at the DOL Rules

These new rules are similar to the IRS common law rules which provide evidence of the degree of control and independence. They fall into three categories:

1. Behavioral:

   Does the company control or have the right to control what the worker does and how the worker does their job?
   
   

2. Financial:

   Are the business aspects of the worker’s job controlled by the payer? Business aspects may include:

   a. how the worker is paid,

   b. whether expenses are reimbursed,

   c. and the provision of tools or supplies.

   d. Consider what other state laws, local or other employment, may be in effect.
   
   

3. Type of Relationship:

   Are there written contracts or employee type benefits? For example, a pension plan, insurance, vacation pay, etc. Will the relationship continue? Is the work performed a key aspect of the business?

Key Takeaway

If the worker has an economic dependency on the business, then they likely classify as an employee, not an independent contractor.

This is all so confusing, you say. Do we follow the Department of Labor, or do we follow IRS or do we follow state rules? We're told that the answer lies with whichever law offers the best benefit to the worker. The answer requires an analysis of all laws which may affect your business. And then determine which law provides the worker with the greatest benefit.

This is not good news.

Every state has its own Labor Department rules and you may have to track many states at the same time. This is particularly true if you have workers located in California. Not to mention the DOL and IRS and other federal laws. Washington is not making it easier for us.

The consequences of misclassifying a worker can be devastating to a business.

For example:

You classify a worker as an independent contractor. But, later you determine that the worker was an employee. The government can require you to pay the taxes you should have withheld, as well as penalties, interest, and the worker's share of taxes. We have seen worker misclassifications almost bankrupt businesses. This is an area of the law that you must strictly adhere to and consider.

What You Can Do Now

1. Re-consider any existing independent contractor relationships.

   a. Is the worker dependent upon your business for their economic welfare?

   b. Are you their only or majority source of income?

   c. How much control do you exercise over their work: how they work, when they work, etc.?

2. If you continue the independent contractor relationship you must have a written agreement. This goes for starting a new working relationship as well. Outline the terms of the relationship that would define an independent contractor. Terms may include:

   a. they supervise their own work,

   b. set their own hours,

   c. are not economically dependent upon you,

   d. are provided a 1099 at year-end, and

   e. that no taxes will be withheld, etc.

   f. but be aware that a contract will not protect you if the facts state otherwise.

Big Thanks

We are big fans of Capital Associated Industries, Inc. (CAI), www.capital.org. CAI helps NC employers build engaged, well-managed, and low-risk workplaces. A recent “Answers At 8” morning brief sponsored by CAI alerted our firm to the new DOL rule. CAI is a marvelous resource. They are keeping businesses up-to-date on employment policies, rules, and regulations. Which is especially useful during this pandemic. We encourage all employers to consider membership in CAI.