A new Department of Labor regulation
that changes the way employers classify employees versus independent contractors is creating confusion among small business owners, who may be using independent contractors, or be operating as independent contractors. The new regulation, which is scheduled to take effect March 11, creates a process with much greater uncertainty for determining whether a person working for your small business is considered by the Department of Labor to be a full-time employee or an independent contractor. Chamber of Commerce policy experts Marc Freedman, Vice President, Employment Policy, and Tom Sullivan, Vice President, Small Business Policy, to get clarity on this issue. Unlike criteria that differentiates full-time employees from part-time employees (number of hours worked per week, for example), defining independent contractors isn’t as clear cut. That’s in part because workers’ compensation is mandated at the state level, so rules aren’t consistent across the board.
- Misclassification can harm a company’s reputation, as it can be seen as an attempt to avoid legal obligations and employee protections.
- Actions taken by the potential employer for the sole purpose of complying with a specific, applicable federal, state, tribal, or local law or regulation are not indicative of control.
- The final rule does not adopt an “ABC” test, which permits an independent contractor relationship only if all three factors in a three-factor test are satisfied.
- You’ll pay employees a salary or by the hour and provide them with mandatory employee benefits.
- Unfortunately, if the company gets the classification of independent contractors wrong, bad things can happen.
- The new rule’s realignment of the department’s guidance with judicial precedent will reduce confusion, improve compliance and better protect working people.
Contractors can set a price for their services, specify their preferred payment method, schedule, and deliver their services in alignment with the terms agreed upon in the contractor agreement. Unlike employees, contractors aren’t entitled to mandatory benefits and must pay their income taxes. This final rule has several similarities to the 2021 Independent Contractor Rule. For example, both rules advise that independent contractors are workers who, as a matter of economic reality, are in business for themselves, whereas https://www.bookstime.com/ FLSA-covered employees are workers who are, as a matter of economic reality, economically dependent on the employer for work. Both rules identify economic dependence as the “ultimate inquiry” of the analysis; both rules provide a non-exhaustive list of factors to assess economic dependence; and both rules caution that no single factor is determinative. Both rules also clarify that economic dependence does not focus on the amount of income the worker earns, or whether the worker has other sources of income.
Employee vs. independent contractor: Differences you need to know
You can change your worker’s status from contractor to employee at any point if you’re happy with their work or if they become crucial to your business. The first step in this process is determining if they meet all the criteria necessary to be an employee by using one of the tests we mentioned in the previous section. The ABC test is a set of guidelines the DOL uses to classify workers as contractors or employees. Authorities may not apply this test in the same way in every state, so in some, it’s also applicable to wages and working hours.
When work is considered integral to the business, it is more likely that the person is an employee. On the other hand, work that is temporary and non integral may imply independent contractor status. A sometimes difficult status to define, what makes an independent contractor has been outlined by common law principles, the Fair Labor Standards Act, and finally the decisions of some courts.
What analysis guides whether a worker is an employee or independent contractor under this final rule?
However, not all states accept this test as the state law—like California, for example—so you’re not obligated to perform it. An independent contractor submits an application (which usually includes a portfolio) to a specific department within your company, independent contractor vs employee skipping the initial HR screen. The contractor hiring process is usually faster since there are not several rounds of interviews, and they are recruited directly. The contractor might complete a proposal outlining the services they can provide.
If you’re a business owner and employ at least one person, you may be legally required to carry workers’ compensation insurance. Who needs coverage and how much a policy will cost depends largely on the state(s) where your employees perform work and how workers are classified for federal tax withholding purposes. Generally speaking, you must withhold and pay income taxes, social security taxes and Medicare taxes as well as pay unemployment tax on wages paid to an employee.