Is a worker an independent contractor or employee? This is an important question that has significant importance for both employers and employees.
Many companies prefer to have independent contractors because it saves them money on payroll taxes and insurance. Workers prefer to be employees because it provides them job security and benefits.
While there have been some basic guidelines over the years; many companies felt they were not quite clear and categorized workers incorrectly. Classifying a working incorrectly can be a very costly mistake and even lead to an audit.
On September 25, 2020, the U.S. Department of Labor (DOL) published a new proposed rule that outlines a test for classifying workers under the FLSA (Fair Labor Standards Act). This new proposal, the “Independent Contractor Status Under the Fair Labor Standards Act” contains the following five-factor test:
- Nature and degree of the individual’s control over the work: the more control the worker has over how work gets done, the more likely the worker is an independent contractor.
- Opportunity for profit or loss: if workers can increase or decrease their earnings by changing their initiative or adjusting business investments or expenditures, then it’s more likely they will be considered an independent contractor.
- Skills required: If the worker’s job involves using skills or training that the employer does not provide, then the worker is more likely going to be an independent contractor.
- Permanence of the working relationship: When a working relationship has a set duration or is unpredictable, the worker is more likely going to be an independent contractor.
- How integral the worker’s services are to the employer’s business: The more related the worker’s duties are to the core of the employer’s business, and then the more likely the worker is an employee.
After accepting comments and becoming a law, this rule will be applied to a number of businesses, such as in the “gig economy”, as it provides clear distinction between independent contractors and employees. However, this rule would not override state law, which in some cases is more strict than federal law, such as in California, which makes it difficult for businesses to classify workers as independent contractors under state law.
For further reading:
https://www.dol.gov/agencies/whd/flsa/2020-independent-contractor-nprm