Independent contractor working

U.S. Department of Labor updates rules for independent contractors

Effective March 11, 2024, the analysis rules for determining independent contractor status were modified. The U.S. Department of Labor’s (DOL) Wage and Hour Division (WHD) claims the modifications are more consistent with judicial precedent and the Fair Labor Standards Act’s (FLSA’s) purpose than the 2021 rule issued during the Trump Administration.

The modifications to the analysis rules are intended to help employers better understand when a worker qualifies as an independent contractor. The misclassification of an employee as an independent contractor can negatively impact both the individual and the employer. The individual may not receive the minimum wage and overtime pay to which they are entitled and they may also be denied other benefits and protections under the law that an employee is eligible for. Additionally, the employer responsible for the misclassification of workers may be subject to significant penalties. Penalties can include fines for failing to properly file Form W-2, withholding taxes and paying matching FICA taxes.

Employers who misclassify workers may face additional consequences such as civil fines, criminal penalties, debarment from government contracts and court orders. Penalties can be particularly harsh if it is determined that the misclassification was intentional.

The updated rule restores a multi-factor analysis, analyzing all relevant factors to determine an employee’s status. This six-factor economic reality test contains no safe harbor for classifying a worker as an independent contractor. The new rule states that a temporary work relationship, the worker’s investment in tools and equipment to perform the job and the worker’s specialized skills don’t necessarily qualify the worker as an independent contractor.

The six-factor economic reality test considers the following:

  1. The worker’s opportunity for profit or loss
  2. The worker’s investments compared with the business’s investments
  3. Permanency of the work relationship
  4. The nature and degree of control over performance of the work and working relationship
  5. Whether the work is an integral part of the business
  6. The criticality and uniqueness of the worker’s skill and business initiative

It is also important for employers to understand that no single factor carries more weight than another. The updated 2024 rule requires employers to look at the worker’s status in totality. Facts that may be relevant under this new test include whether workers can set or negotiate the rate for services they provide and workers’ ability to work elsewhere.

In addition to the federal regulations, employers must also be aware of and comply with individual state requirements when it comes to the utilization of independent contractors. For example, effective January 1, 2024, Illinois employers were required to begin reporting independent contractors just as they would report any new employee. This means an independent contractor’s full name, social security number, address and contract start date must be supplied with any other new hire reporting.

Effective April 1, 2024, an independent contractor working in Illinois who is assigned to work at a third-party client for more than 90 calendar days must receive pay equal to a W-2 employee directly hired by the client. The Illinois Day and Temporary Labor Services Act (IDTLSA) originally stated independent contractors are to receive the same pay and benefits equal to a W-2 employee. However, the benefits component of the regulation is currently held up in Illinois courts. As a result, while independent contractors engaged after April 1 who work for a client for more than 90 calendar days must receive pay equal to a W-2 employee, it is unknown if employers will be required to provide the same benefits until the court makes a ruling.

In today’s tight job market, independent contractors can fill the skills and resource gaps that currently exist. However, organizations should be aware of the risks they face if they incorrectly classify a laborer as an independent contractor versus a traditional W-2 employee.

Classifying workers correctly isn't simple or easy and Baker Tilly is here to help. Reach out to learn more about how we can help your organization properly classify independent contractors.

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