Independent or Employee? DOL Sets New Employee Classification Rule.

A new rule from the U.S. Department of Labor seeks to provide new guidelines for employee classification as either employees or independent contractors. This is a rather rare event, because there hasn’t been much formal legislative guidance on this topic since roughly the end of World War 2. In today’s economy though, it’s become a very important issue for lots of companies.

Depending on which source you consider, the estimation is that about 7 to 10 percent of American workers are independent contractors, or as many as 10 to 15 million people. The pandemic could very well have created many more, but accurate data has been unavailable.

A worker’s classification has a big impact on both the individual and their company. As explained by the Dept. of Health and Human Services, “A business may pay an independent contractor and an employee for the same or similar work, but there are important legal differences between the two. For the employee, the company withholds income tax, Social Security, and Medicare from wages paid. For the independent contractor, the company does not withhold taxes. Employment and labor laws also do not apply to independent contractors.”

With so much riding on an accurate employee classification, businesses that use independent contractors are advised to familiarize themselves with the new rule.

A New Test to Determine Classification

In the text of the new independent contractor status rule, the organization outlined several key points. Among them is a new test that companies will be considering as they determine their worker classifications.

The new rule will:

• Adopt an “economic reality” test to determine a worker’s status as an employee or an independent contractor. The test considers whether a worker is in business for themselves (independent contractor) or is economically dependent on a putative employer for work (employee).
• Identify and explain two “core factors.” Specifically:

  • The nature and degree of the worker’s control over the work,
  • And the worker’s opportunity for profit or loss based on initiative and/or investment.

• Identify three other factors that may serve as additional guideposts in the analysis. This includes:

  • The amount of skill required for the work,
  • The degree of permanence of the working relationship between the worker and the potential employer,
  • And whether the work is part of an integrated unit of production.

• Advise that the actual practice is more relevant than what may be contractually or theoretically possible in making status determinations.
• Additionally, the new rule outlines a few examples for applying the factors.

The DOL’s Reasoning

Last year, Labor Department Secretary Eugene Scalia explained that one of the primary goals for the new rule was to create greater efficiency for everyone involved – workers, companies, and the court system.

During early announcements about the rule, Scalia said, “The Department believes that streamlining and clarifying the test to identify independent contractors will reduce worker misclassification, reduce litigation, increase efficiency, and increase job satisfaction, and flexibility.”

He elaborated further in an op ed for Fox Business, in which he wrote, “Make no mistake, harmonization is needed. Right now, when determining whether a worker’s an independent contractor, some courts routinely consider the “importance” of the work she does to the company that hired her; other courts do not.”

“And while courts agree that “investment” should be part of the analysis, some courts ask whether the worker will profit from the investment she makes in her work, whereas others (oddly) compare the dollar value of her investment to the total capital investment by the company,” he added. “In two separate cases, a single federal appellate court reached different conclusions on the question of whether cable-slicers working for BellSouth contractors were employees or independent contractors.”

Check with Your Expert

Any time a new rule is created that impacts millions of workers in unique ways, it’s understandably going to produce different headaches for different industries. Accurate classification is a big deal. Business leaders may benefit from a quick consult with their employment law experts to ensure they’re in compliance with the new changes.