- Deadline approaches. By March 11, U.S. employers must apply the new rule for classifying workers as employees or independent contractors.
- Key DOL factors to consider. As employers apply the new rule, they must consider the six factors set forth by the Department of Labor (DOL). Experts point out key elements, such control over a worker’s schedule and the degree to which the worker’s business is central to that of the employer.
- Consider non-DOL factors, too. Employers also should take into account guidance from other federal and state agencies.
On March 11, employers will need to start applying a new rule from the Department of Labor (DOL) when classifying workers as employees or independent contractors. The deadline is fast approaching, and as employers prepare to meet it, they may need to consider several factors — including those issued by other agencies.
When working to comply with the new rules, there is an incentive to get it right from day one. Starting March 11, employers that misclassify independent contractors can be liable for back taxes from that date forward, said Matt Fuhrman, founder and CEO of Core Group Resources, a global staffing company.
“Initially enforcement will be passive,” he said, noting that the DOL will review each case as it arises via state workforce commission authorities. But, he added, “if they are seeing a high volume of problems and violations, one can expect enforcement to become more proactive.”
Considering Key DOL Factors
When working to determine if a worker is an independent contractor, employers will need to consider the six factors listed in the DOL guidelines:
- A worker’s opportunity for profit or loss.
- Investments made by the worker and the potential employer.
- The degree of permanence of the work relationship.
- The nature and degree of control over the performance of the work.
- The extent to which the work performed is integral to the employer’s business.
- The use of the worker’s skill and initiative.
Ronald Adler, president and CEO at Laurdan Associates, Inc., said an important issue from the DOL’s point of view is whether the work performed is an integral part of a potential employer's business, rather than just part of an integrated unit of production.
“DOL also notes that a broader discussion of how scheduling, remote supervision, price setting and the ability to work for others should be considered,” he said, adding that in its final analysis DOL stresses the importance of “economic dependence.” That means workers are classified as independent contractors if they, as a matter of economic reality, are in business for themselves, rather than solely working for the benefit of the business.
Furhman added that employers need to consider the permanence of the working relationship and the control they have over workers’ schedules.
Ultimately, he cautioned, if employers discover contractors who no longer qualify for that designation under the new rule, they must act. “If they find a group of contractors fall under W-2 status, they should convert those contractors” to employees, he said.
Considering Rules from Other Entities
Employers should consider not only the new DOL rule, but rules and tests from other federal agencies — like the IRS — as well as those of the state in which a contractor is working, said Christine Walters, an employment law and HR attorney and sole proprietor at the FiveL Company.
For example, Walters noted that state workers’ compensation and unemployment insurance codes may use their own definition of independent contractor. She added that more than half of the states use what is commonly referred to as the ABC test:
- An Absence of control by the would-be employer over the worker.
- The Business of the contractor is outside the regular course of the would-be employer’s business.
- The Contractor is customarily engaged in an independent trade, occupation, profession or business.
“The trick is that it is not as easy to use as the name might imply. Some states use all three factors; some use just the A and B, and some use just the A and the C,” Walters said.
So, how can an employer best move forward as the deadline approaches?
“Certainly, whatever path employers choose they should do so in consultation with employment counsel,” Walters said. “It’s important to get this right. If you don’t, it may mean fines, penalties and other punitive measures from various federal and possibly state agencies for failure to withhold Social Security, Medicare, and FICA taxes; file W-2 forms; and more.”
Classifying Contractors as Employees
For employers nervous about compliance, “one simple route is to prospectively employ these workers as temporary, full-time or part-time employees,” said Walters. While this approach avoids the scrutiny of the DOL and state agencies, it also comes with downsides — including potential new administrative burdens, like regular new-hire paperwork, and a requirement to offer certain benefits.
Such an approach might face another hurdle, she noted: Some contractors may not wish to become employees.
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