Independent contractor agreement

Proposed Rule Makes Independent Contractor Classification Easier

The federal Department of Labor has proposed a regulation that would make it easier for employers to classify workers as independent contractors.

The regulation would use an “economic reality” test to determine a worker’s status. This means that if worker is an employee of a hiring entity “as a matter of economic reality, the individual is economically dependent on that employer for work.”

Conversely, the individual is an independent contractor “if the individual is, as a matter of economic reality, in business for him- or herself.”

The proposed rules are a looser standard than current DOL regulations and would allow employers to classify outside workers as independent contractors more easily.

Whether a worker is an employee or an independent contractor is critical when it comes to important issues such as benefits eligibility (health insurance, vacation), workers’ compensation coverage, wage and hour laws, and many other matters.

The department said that the rule is designed to “bring clarity and consistency to the determination of who’s an independent contractor …” Currently, courts, the DOL and other agencies consider numerous factors when making that determination. For example, the Internal Revenue Service looks at as many as 13 factors.

The proposed rule

To determine whether the individual is “economically dependent” on an employer, the proposed regulation employs five factors, with the first two being the “core” factors and none of them on their own tipping the balance. The core factors are:

  • The nature and degree of the individual’s control over the work – This means how much control the individual has over work hours, project selection, and the ability to work for others who might be competitors of the employer.
  • The individual’s opportunity for profit or loss – This looks at the individual’s opportunity to make or lose money “based on his or her exercise of initiative” and spending on materials and labor to further the work.

The other factors, called “additional guideposts,” are:

  • The amount of skill required for the work – This means “the extent the work at issue requires specialized training or skill that the potential employer does not provide.”
  • How permanent the working relationship is between individual and employer – If the relationship is “by design definite in duration or sporadic,” the regulation would tend to classify the individual as an independent contractor.
  • Whether the work is part of an integrated unit of production – This means whether the individual’s work is separate from the employer’s production process or a part of that process. Separate work implies independent contractor status.

It is important to note that the regulation does not mention as a factor the form the employer uses to report income to the IRS. The mere fact that an employer reports an individual’s compensation on Form 1099 has no bearing on whether that person is an independent contractor. This is contrary to the belief of many employers.

The takeaway

The proposed rule would make it easier for employers to designate individuals as independent contractors.

Groups such as the American Trucking Association have praised the proposal, while a workers’ advocacy group said that “construction workers, agricultural workers, janitors, home care workers … all stand to lose from this rule.”

The public has the opportunity to send comments to the DOL on the proposed regulation until Oct. 26. The department reportedly wants to make the regulation permanent before the end of the year.

The concern is that President Trump may lose his bid for re-election and that his opponent, Joe Biden, may block the regulation from taking effect. 

If you are an employer, it is unclear whether the workers you hire are independent contractors. Depending on the outcome of the presidential race, it may not be much clearer in the future.

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