In the final days of the Trump Administration, the Department of Labor put forward clarifications to help businesses determine whether workers could properly be classified as employees or independent contractors. Under the new guidance, the Department of Labor would initially consider only two factors – specifically, the level of control the individual has over his or her own work and the opportunity for profit or loss due to his or her own personal investment. If, and only if, these factors were inconclusive would businesses then proceed to evaluate or consider the level of skill of the role involved, the permanence of the working relationship and how the role in question relates to the business’ overall business operation.
The Biden Administration, however, announced the repeal of such guidance effective May 6, 2021. Hence, businesses must again consider and evaluate multiple factors, none of which is individually determinative, when attempting to classify a worker as an independent contractor. These factors include: (1) the extent to which the services rendered are an integral part of the business; (2) the permanency of the relationship; (3) the amount of the worker or alleged contractor’s investment in facilities and equipment; (4) the nature and degree of control by the business; (5) the worker or alleged contractor’s opportunities for profit and loss; (6) the amount of initiative, judgment, or foresight in open market competition with others required for the success of the alleged independent contractor; and (7) the degree of independent business organization and operation between the worker and the business.
The attention generated by the change in guidance has been significant and highlights the importance of properly classifying workers. These reasons include, but are not limited to, the following:
- Employers must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an employee, while the earnings of an independent contractor are subject to self-employment tax.
- Coverage under worker’s compensation insurance and other benefit plans offered to workers.
- Ensuring proper compliance with the Fair Labor Standards Act (which controls minimum wages and overtime pay to employees), the Family Medical Leave Act, and other employment laws.
- Compliance with the Immigration Reform & Control Act (which requires employers to obtain a Form I-9 for all employees) and, where applicable, e-verification requirements.
- Avoiding liability for misclassification, which can arise years later and even though the worker and business may have, at the time, agreed upon the classification.
For further assistance in determining how these changes may impact your business and in reviewing the classification of workers, prudent businesses should contact the attorneys of Law Firm Carolinas.