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New final rule on independent contractors takes effect in March

It’s safe to say that independent contractors or “gig workers” are firmly ensconced in the U.S. economy — especially in certain industries. And we don’t mean only those helpful folks who drop off dinner at the front door or give you a ride home from the restaurant.

Nay, many kinds of independent contractors are available to serve employers, too. They can provide expertise for special projects or fill short-term positions to get your organization through busy times without having to incur hiring costs. Moreover, you don’t need to remit payroll taxes on independent contractors’ compensation, nor must you provide gig workers with fringe benefits. What’s not to like, right?

A moving target

Enter the U.S. Department of Labor (DOL). It has long been on the lookout for employers that, in the agency’s view, misclassify employees as independent contractors. If the DOL successfully makes a case for employee misclassification, the employer in question may be on the hook for substantial back wages, penalties and interest. There can be other legal repercussions as well.

To enforce employee classification, the DOL relies on a final rule that determines whether a worker should be classified as an employee or independent contractor under the Fair Labor Standards Act (FLSA). In recent years, however, the final rule has been a moving target pushed one way or the other by whichever presidential administration is in power.

For example, the final rule set forth during the Obama administration was considered relatively tough on employers. Under what was referred to as the “totality-of-the-circumstances” test, the DOL and courts applied at least five factors to making the employee vs. independent contractor determination, with no single factor controlling.

The Trump administration then revised the final rule to look more broadly at whether, as an “economic reality,” workers are:

  • Dependent on their employer for work, which would generally make them employees, or
  • In business for themselves, which would generally make them independent contractors.

This was regarded as a more employer-friendly version.

6 critical factors

Now, during the Biden administration, the final rule has changed yet again. In October 2022, the DOL proposed regulations that would bring back the totality-of-the-circumstances test with its multiple factors. On January 9, the DOL announced issuance of final regs that rescind and replace the previous regs. The final regs also make some adjustments and clarifications to the proposed regs but still focus on multiple factors — six, to be exact — to determine whether a worker is an employee or independent contractor:

  1. The worker’s opportunity for profit or loss,
  2. Investments by the worker and employer,
  3. The degree of permanence of the work relationship,
  4. The nature and degree of control of work performance,
  5. The extent to which the work is an integral part of the employer’s business, and
  6. The skill and initiative required for the work.

The final rule officially takes effect on March 11, 2024.

Legal challenges possible

The DOL contends that the new final rule protects vulnerable workers who may be misclassified as independent contractors by employers looking to dodge the rules regarding minimum wages and overtime as well as the protections of the FLSA, all of which are applicable to employees. However, many industry groups believe it’s too restrictive, so legal challenges are possible.

As an employer, you may want to review the independent contractor agreements you have in place, along with any prospective ones, in consultation with your attorney. Padgett can help you identify and analyze all the costs and tax implications associated with hiring employees vs. engaging gig workers. Get in touch with us today to get started.

We encourage you to contact us with any questions.

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