NEW TESTS COMING TO DETERMINE INDEPENDENT CONTRACTORS VERSUS EMPLOYEES
In 2021, we received a new set of tests for determining whether a worker was an independent contractor or employee. It was reasonable and fairly easy to follow.
So, of course, the government had to change it.
The Dept of Labor published the new rules on October 13, 2022. That starts the clock ticking for 45 days during which the Department accepts public comments. It’s hard to say what, if any, changes the Dept will make after it receives those comments.
You may have heard that the new test is whether the worker needs the work or not. If they need it, they’re an employee. Otherwise, they’re an independent contractor.
That’s not exactly how it works. The following is a brief synopsis of the changes that may soon be coming to your business.
First of all, forget what you were told in 2021. The “core factors” test that we had in 2021 is history. There is a new test in town.
This new test looks at the economic reality of the whole relationship. An employee is defined as someone that the employer employs. That sounds simplistic, but that’s the definition. It is meant to include all workers who aren’t independent contractors. An employee is economically dependent on their employer. But it doesn’t matter whether the employee has other streams of income or how much the employer pays him.
Instead, there are six elements to the economic reality test:
#1: The opportunity for profit or loss depends on the managerial skill. If the only way a worker can make more money is by working longer hours, then he is an employee. If he has the ability to market or advertise or add new products or services to increase his business, he sounds more like an independent contractor.
#2: Investments by the worker and the employer. An investment is an expenditure that is more entrepreneurial in nature and helps the business operate in business-like function. Examples would be new training for workers to add new types of work, reducing costs and extending market research. A worker who invests in his business like a business owner does is more likely to be considered an independent contractor. If the employing company pays for all training, it will sound like an employee relationship.
#3: Permanent nature of work. If the work is indefinite in duration, it looks more like an employee relationship. If the work is definite in duration, with a precise start and stop, project-based or sporadic, the worker is more likely to be an independent contractor.
#4: Nature and degree of control. An employer controls an employee’s work and the relationship including things like the worker’s schedule, the performance of work, limits ability for the worker to work for others, and controls pay, hours and marketing of services.
An independent contractor has much fewer controls and is allowed to find other clients or customers, determine their own schedule and sets the price for the work they do.
#5: The performed work is an integral part of the employer’s business. If the work is critical to the employer’s principal business this points to an employee/employer relationship.
#6: Skill and initiative. The more specialized skills and training that a worker brings to the relationship, the more likely he or she is an independent contractor. An employer would be more likely to pay for the training of an employee. An independent contractor is already trained.
From the news releases that have come through the Department of Labor and other governmental agencies, it appears that #3, permanence of the work, is especially important. A regular paying gig is more likely to make the worker dependent on the work and that relationship means employment, at least according to the new rules.
What Does Having an Employee Versus Independent Contractor Mean?
An employee will receive certain mandated benefits. In some states that means a minimum wage, mandatory sick time, overtime and reimbursement for certain expenses. More employees (versus independent contractors) can mean more support costs, medical insurance and retirement plans.
Employees mean payroll taxes and it’s harder and slower to gear up or slow your business down.
A Strategy That Ensures Independent Contractors
Unfortunately, there isn’t one thing you can do that absolutely guarantees that you will be ruled to have an independent contractor. But there are some things you can do that would make it hard to prove you have an independent contractor.
Make sure you contract with your worker’s business and not the worker personally. Don’t control when and how the worker works. Just contract for the deliverable. Have a definite end milestone or date for the work. Consider hiring virtual workers outside your town, your state and even your country. The further removed you are, the easier it is to prove you have independent contractors.