The Department of Labor (DOL) announced plans on October 13, 2022, to make it harder for employers to classify workers as independent contractors under the federal Fair Labor Standards Act.
Why it’s important for your business to classify independent contractors (1099 status) correctly:
- Misclassifying a worker can cost the business in taxes and interest, plus penalties in lawsuits.
- Employers are responsible for classifying workers correctly.
- Neither the business nor the individual may choose whether the worker is classified as a contractor or employee. The relationship between the parties and the presence of direction and control determine whether or not a worker is an employee or an independent contractor.
- A worker who is called contract labor and whose wages are reported using IRS Form 1099 may not be an independent contractor.
The DOL’s proposed new rule would implement in the following 6 factors:
- Whether the worker has an opportunity to make a profit or sustain a loss
- The investments made by the employer and the worker
- The degree of permanence of the work relationship between the parties
- The nature as well as the degree of control exercised by the employer over the worker
- The extent to which the work is integral to the employer’s business, and
- The level of skill and initiative that is involved with the work.
The ultimate inquiry, the DOL explains, is whether the worker is economically dependent on the employer or is in business for themself.
On an ongoing basis, it’s vital to evaluate, discuss, and document changes in an independent contractor’s role and responsibility. Any legal repercussions drain time and energy from leadership and profits from the business.
Achilles Group works with small to mid-sized businesses to discuss, review, audit, and implement the steps involved in classifying employees correctly.
Reach out to your Achilles Designated Consultant for further information.
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Further readings:
Littler: Department of Labor Proposes New Rule for Independent Contractor Status
Fisherphillips: Labor Department Proposes to Rescind Flexible Independent Contractor Test and Re-Impose Outdated Standard: 5 Key Questions
HrMorning: $46.5 million question: Employee or independent contractor?
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