The United States Department of Labor (“DOL”) has released a final rule that revises and clarifies the analysis it will use to determine whether a worker is an employee or an independent contractor. Employers should pay close attention to this new rule. The misclassification of workers can cause serious consequences from not only the DOL, but entities such as the IRS and the Vermont Department of Labor. Consequences from the DOL include payment of back wages to employees misclassified as “contractors” and possible criminal penalties, including payment of up $1,000 per misclassified employee and jail time of up to a year. Penalties from the IRS and the Vermont Department of labor can range from intensive audits to serious fines.
Employers should consider auditing the responsibilities of any workers they have classified as independent contractors, so they can avoid misclassification and the costly results associated with it.
The New Rule
The final rule, which takes effect on March 11th, looks at six factors when determining whether an employee should be classified as an independent contractor or employee. It aligns with the federal courts’ interpretation of the Fair Labor Standards Act and the economic reality test. This test weighs a list of factors equally to determine whether a worker should be classified as an employee or independent contractor. These factors are:
- the opportunity for profit or loss within the business;
- the amount of control the worker has over the work being done;
- the amount of skill required for the work;
- how permanent the working relationship is;
- whether the worker is investing in equipment or materials required for the task; and
- whether the service the worker is providing is an important part of the employer’s business.
Prior to this rule, two factors (the nature and degree of control over the work and the worker’s opportunity for profit or loss) were weighed more heavily than the rest, making it easier to classify a worker as an independent contractor. Now, because all these factors are weight equally, it is now more difficult for an employer to do so.
The Difference Between an Independent Contractor and an Employee
Generally speaking, independent contractors run their own business. They manage their own benefits, pay their own taxes, dictate their own hours, and are usually in an established trade. An employee is a part of the business as a whole. They are usually paid a salary or an hourly rate, and the employer is responsible for setting their hours, providing benefits, and making the necessary tax and Social Security deductions.
Who is Affected and What Employers Should Do
Currently, this rule affects companies who have independent contractors or are considering contracting work from one. It would be incredibly beneficial for employers to closely examine these relationships to determine if these workers would be better classified as employees to avoid costly legal fees and fines.
Here at Gravel & Shea, we help companies take the proper steps to ensure that their independent contractors are properly classified and are not placing the company at a heightened audit risk. We are also able to provide counsel to companies who have been audited by the IRS or the Vermont Department of Labor.
Helpful Link:
Final Rule FAQ: https://www.dol.gov/agencies/whd/flsa/misclassification/rulemaking/faqs
Please contact Heather Hammond (hhammond@gravelshea.com) at Gravel & Shea PC if you have questions or would like assistance.
