Are Your Employees Actually 1099 or W2?

recently proposed rule issued by the Department of Labor (DOL) implements an “economic reality” test that helps determine the independent contractor status of a worker. The clarification is designed to bring simplicity and consistency to worker classifications. Here’s how it works.

Refresher: What is an Independent Contractor?

An independent contractor is a self-employed individual, business, or corporation that provides services to another individual or business under the terms laid out in a contract. They are not considered employees, as they work only when required.

The differences between an independent contractor and an employee are varied but vital, particularly legally. According to the IRS, “you are not an independent contractor if you perform services that can be controlled by an employer.”

New Proposed Rule Eases Qualifications for Defining Independent Contractors

The new proposed rule suggests four main changes to the process of determining a worker’s independent contractor status:

  1. “Economic Reality” Test: The new test determines if a worker is in business for themself (independent contractor) or economically dependent on an employer for work (employee). 

  2. “Core Factors”: Two core factors help determine whether or not a worker is economically dependent on an employer. They include the nature and degree of the worker’s control over their work and the worker’s opportunity for profit or loss based on initiative and/or investment. 

  3. Three Additional Factors: If unable to determine a worker’s status, three additional factors can be used to help determine classification. They include the amount of skill required for the work, the degree of permanence in the relationship between the worker and the employer, and if the work is part of an integrated unit of production. 

  4. Actual Practice Relevance: When determining a worker’s independent contractor status, actual practice is more relevant than what’s contractually or theoretically possible.

Announced Sept. 22, 2020, the rule is available for review and public comment for 30 days. Once finalized, it could be implemented as early as January 2021, according to The National Law Review.

How Will the Changes Impact Employers?

In theory, the proposed changes simply the process that determines worker classification, which could reduce misclassification. According to the DOL, this would lead to fewer lawsuits, more efficient workforces, and higher job satisfaction among workers.

However, in the same National Law Review article mentioned above, author Laura Lawless says that while the regulations may “help employers facing federal lawsuits under the Fair Labor Standards Act,” the new rules don’t completely eliminate the risk of litigation. This is mainly due to worker protections afforded by state laws, which can be narrower than federal definitions. 

When determining whether or not a worker is an independent contractor, HR teams should utilize the above criteria and continue to comply with state regulations if they’re stricter than the new DOL rule.

Source: Bernie Portal

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