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DOL proposes rule changing who counts as an independent contractor

Friday, October 14, 2022

On Oct. 13, 2022, the US Department of Labor (DOL) Wage and Hour Division (WHD) published a proposed rule aiming to change how employers, courts and regulatory agencies determine if a worker is an independent contractor under federal law.

That change could mean that some of the freelancers or gig workers you rely on would be reclassified as employees, making them eligible for certain protections under the Fair Labor Standards Act (FLSA), like minimum wage and overtime pay. Which also means you could potentially end up with more people on your payroll.

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What does the proposed rule say?

At 58 pages, the short answer is: a lot. But at its core, the proposed rule establishes a six-factor economic reality test designed to reveal the level of economic dependency a worker has on an employer. A greater dependency likely means the worker is classified as an employee and vice versa.

The six factors are:

  1. The nature and degree of the employer's right to control the manner in which the work is to be performed

  2. The worker's opportunity for profit or loss depending upon his or her managerial skill

  3. The amount and nature of the worker’s financial investment in their work compared to those of their employer

  4. Whether the service rendered requires a special skill and is performed in the spirit of a business initiative

  5. The degree of permanence of the working relationship

  6. The extent to which the service rendered is an integral part of the employer's business

When using the economic reality test to classify a worker as an independent contractor or an employee, the proposed rule asserts that each factor should be considered equally. Under the proposed rule, no specific factor tips the scales toward a particular classification more than another.

For example, a worker who had a lot of control over her schedule and bought some of her own work supplies wouldn’t necessarily be given independent contractor status under the proposed rule. That would be especially true if her employment didn’t have a predetermined end date, or she wasn’t in danger of incurring a substantial financial loss for poor performance.

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How is the proposed rule different from the current one?

Detailing every way they’re different would take some time. So we’ll just hit the high notes here.

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A different standard: Under the current rule, the test is designed to reveal the amount of control workers have over how and when they complete their work, in addition to how much money they make or lose. The idea of control, profit and loss determines whether a worker is an independent contractor or an employee.

The proposed rule replaces the old criteria with a test that aims to reveal how economically dependent a worker is on the entity that employs them. The degree to which a worker “puts all of their eggs in one basket” determines a worker’s classification — not solely their level of control or opportunity for profit or loss, which is a main consideration of the current rule.

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An expanded test: Currently, a worker’s classification largely depends on two factors that make up part of a five-factor test. These factors essentially narrow the definition of an employee, allowing more workers to be classified as independent contractors.

Those two predominant factors are:

  • the degree of control the employer has over the worker, and

  • the worker’s opportunity for profit or loss

The proposed rule leans in the opposite direction; expanding the test and ultimately the likelihood that a worker would be classified as an employee instead of an independent contractor.

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New criteria for evaluation: As we mentioned before, the current rule designates two specific factors as more important than the others in determining whether a worker is an independent contractor. The rule also stipulates that those two factors are so important, the remaining three — even if they all point toward a different classification — would not be strong enough to sway the final decision about a worker’s status in the opposite direction.

In contrast, the proposed rule dictates that each factor should be considered equally in reaching a conclusion about a worker’s classification. When using the test to analyze whether a worker is an independent contractor, no one factor should hold more weight than another in reaching a conclusion.

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What could this mean for my small business?

Should the proposed rule become final in its current form, any US business — no matter how big or small — that hires independent contractors or employees would be required to classify workers according to the six-factor test. If you rely on freelancers, you will probably need to make some strategic decisions about your staff and labor pool.

Even though the proposed rule isn’t final, mulling over these scenarios before it’s in effect and you’re up against a compliance deadline will help you find the right solution for your business.

You can start by identifying the contractors you employ and use the proposed six-factor test to see whether they would still be classified as contractors under the proposed rule. Once you’ve identified who would need to be reclassified, think through how you might want to handle that.

Consider:

  1. Who would you hire?

  2. Who would you dismiss?

  3. How would those changes affect your ability to serve your customers?

  4. How much would hiring newly classified employees affect your labor costs?

  5. Would incurring added expenses and responsibilities around employment taxes, worker’s compensation coverage, unemployment insurance costs and more be worth it?

  6. Do you have the tools you need to easily manage your people and processes?

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What’s the next step in the rulemaking process?

The proposed rule will be open for public comment until Dec. 13, 2022. You can submit feedback or comments electronically or through the mail. Check out the proposed rule for more information.

Once the public comment period is closed, the DOL WHD will revisit the proposed rule in light of public feedback and potentially make changes. Once that’s done, they will submit the rule for budgetary review and approval. If it passes, the final rule will be published in the Federal Register. If not, a rewrite of the proposed rule will be necessary.

While the timeline ultimately depends on several unpredictable factors, it’s reasonable to assume the new rule will be published as law early in 2023.

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Rely on tech to make managing people and HR easier

No matter how you decide to overcome the challenges the proposed rule poses for your business, Heartland has the tools to make managing employees and HR easier.

Expect a team of payroll experts to walk you through the numbers and do the heavy lifting when it comes to managing payroll and payroll taxes. You can also count on a team of SHRM-certified pros to help you make the right decisions and manage tough conversations around employee classification. Lastly, we’ll send you alerts anytime changes like this one come up. That way, you can enjoy the peace of mind that comes from knowing we’re here to help you manage it all without breaking your back — or the bank.

To learn more about how we can help, contact our sales team and ask for more information on Payroll+. And stay tuned! We’ll post additional resources about the proposed rule here in the coming weeks.

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Disclaimer: The information provided in this document does not, and is not intended to constitute legal advice; instead, all information, content, and materials available are for general informational purposes only. Information provided may not constitute the most up-to-date legal or other information, and readers of this information should contact their attorney to obtain advice with respect to any particular legal matter, in the relevant jurisdiction. All liability with respect to actions taken or not taken based on the contents here are hereby expressly disclaimed.


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