WORKER CLASSIFICATION – WHAT’S IN A NAME?
Déjà vu … All Over Again!
History, Confusion, Efforts to Clarify
Legal and regulatory debates have repeatedly taken center stage at the state and federal levels, the topic … what workers may appropriately be deemed “employees” and which class of workers may be classified as “independent contractors”?
There have been multiple efforts to define the above classifications since the 1938 inception of the Federal Labor Standards Act (FLSA). Disappointingly, the Act does not address the specific definition of either categorization.
A worker’s classification has real world financial consequences for both the individual worker and the company utilizing their services. Independent contractors are not eligible for state or federal minimum wages. Additionally, they are not entitled to overtime pay, workers compensation coverage, unemployment insurance, or benefits. Effectively, independent contractors do not enjoy the protections of state or federal workplace law as do employees.
Employers are often tempted to seek grounds to classify workers as independent contractors rather than employees. Doing so relieves the employer of paying its share of employment taxes … plus avoiding withholding and paying income, Social Security and Medicare taxes. That said, employers are cautioned to be diligent in their research before classifying workers as independent contractors. Misclassifying a worker may subject the business to significant financial penalties.
The latest effort to define employee or independent contractor classification under the FLSA occurred on January 10, 2024. On that date, the U.S. Department of Labor (DOL) published a final rule, effective March 11, 2024, which rescinds the more employer-friendly 2021 test implemented under the Trump Administration.
6 Key Factors to Determine Classification Status
A prudent place for employers to seek guidance is to review how the revised DOL rule restores the premise of equally weighting six factors identified in the rule.
- Opportunity for profit or loss
- Investments by the worker and the employer
- Permanence of the work relationship
- Nature and degree of control
- Whether the work performed is integral to the employer’s business
- Skills and initiative
Checklist Summary
Opportunity for profit or loss: Are profits or losses impacted by the worker exercising initiative or business expertise? For example, can the worker:
- negotiate his/her compensation;
- accept or decline jobs;
- perform like a business, e.g. marketing functions, hiring/firing other workers, purchase materials and equipment?
Investments by the worker and the employer: Does the worker make investments in his/her business that demonstrates the worker is operating independently?
Permanence of the work relationship: The worker is more likely to be construed to be an independent contractor when similar jobs are:
- provided to a variety of employers;
- project based;
- open-ended in duration.
Nature and degree of control: The following would favor classification as an employee:
- sets own work schedule;
- supervises performance of the work;
- sets billing rates for services;
- authority to discipline other workers;
- freedom restricted to work for others.
Whether the work performed is integral to the employer’s business: Is the work performed a specific necessity for the employer’s principal business?
Skills and initiative: Both employees and independent contractors may demonstrate and perform applying specialized skills. That said, a worker who does not use specialized skills in performing work or requires training from the employer is likely to be classified as an employee.
Employer Action Items
With the above as a guide, an employee is generally considered anyone who performs services under circumstances that the business can control what will be done and how it will be done. What matters is that the business has the right to control the details of how the worker’s services are performed.
In contrast, independent contractors are typically people in an independent trade, business or profession in which they offer their services to the public. Workers often classified as independent contractors include truck drivers, home health workers, auto mechanics, carpenters, plumbers, painters, roofers, drywall installers, among others.
The new DOL rule expands the compliance standards for classifying employees. It makes sense for employers to review existing independent contractor agreements to assure compliance with the new federal requirements as well as state rules and regulations.
The foregoing is meant as an overview only. Click here for FAQs.
For more on how the above applies to your specific circumstances, be sure to give Pearson & Co a call or drop an email. We’ll respond immediately.
