A recently issued ruling by the Department of Labor (DOL) implements an “economic reality” test that helps determine the independent contractor status of a worker. The clarification, which takes effect March 8, 2021, 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.
Under the Fair Labor Standards Act (FLSA), 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 Rule Clarifies Standards for Defining Independent Contractors
The newly issued rule includes four main changes to the process of determining if a worker is an independent contractor. Now, the standard for employee versus independent contractor status under the FLSA includes:
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“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).
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“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.
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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.
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Actual Practice Relevance: When determining a worker’s independent contractor status, actual practice is more relevant than what’s contractually or theoretically possible.
Proposed Sept. 22, 2020, and finalized on Jan. 6, 2021, the final rule will take effect March 8, 2021.
How Will Changes to Independent Contractor Standards Impact Employers?
In theory, the changes simplify the process that determines a worker\’s status, which could reduce misclassification. According to the DOL, this would lead to fewer lawsuits, more efficient workforces, and higher job satisfaction among workers.
These new standards will help teams identify if certain workers qualify for minimum wage and overtime, which might impact an organization\’s compliance efforts moving forward. HR teams should consider the above criteria when determining whether or not a worker is an independent contractor and continue to comply with state regulations if they’re stricter than the new DOL rule.
You can chat with our team to see what impacts this will have on your Employee Benefits eligibility?
Source: Bernie Portal
