Employee Versus Independent Contractor

Posted by BAS - 10 November, 2022

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The Department of Labor is once again modifying the rules for determining if a worker is an employee or independent contractor under the Fair Labor Standards Act. A new proposed rule will cause more workers to be classified as employees under the FLSA.

To determine if a worker is an employee or independent contractor, the Department of Labor has typically used an “economic reality” test and considered if the worker is economically dependent on the employer or in business for themselves. The economic realities test analyzes the totality of the circumstances and looks at many factors including the worker’s investment, the opportunity for the worker’s profit or loss, the permanency of the relationship, the degree of the employer’s control over the worker, whether the work is integral to the business, and the skill involved.

A new proposed rule announced by the DOL places emphasis on whether the worker has an opportunity for profit or loss and whether the worker exercises managerial skill to impact the worker’s economic success or failure. If the worker has no opportunity for loss, the DOL would consider the individual to be an employee and not an independent contractor. With respect to managerial skill, the DOL says consideration must be given to whether the worker determines or negotiates compensation for work; whether the worker accepts or declines jobs or can negotiate a schedule; whether the worker engages in marketing to get more work; and whether the worker makes decisions to hire others, purchase materials or rent space.

The new rule also looks at whether a work relationship is indefinite in duration or continual, with a fixed engagement more indicative of an independent contractor and a continuous relationship indicative of an employee.

With the new guidance, employers should pay attention to how they categorize all workers. The new rule uses a multifactor test without assigning weight to one particular factor. The economic realities of the situation heavily influence the determination of independent contractor or employee status.

All employers who pay independent contractors should review the relationship to determine if they are classifying the workers properly.

Topics: HR & Benefits Compliance, HR & Benefit Plans, HR & Benefits, HR & Benefits News


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