The US Department of Labor (DOL) is looking to adjust a rule that will help employers classify employees correctly. The DOL published a Notice of Proposed Rulemaking in October that will provide guidance on classifying workers as employees or independent contractors under the Fair Labor Standards Act. Misclassification of workers is prohibited in the FLSA as it denies workers their rights if they’re employees but classified as independent contractors.
The proposal rule, which is open to comment until November 28, 2022, would do the following:
- Align the department’s approach with the courts’ FLSA interpretation and the economic reality test.
- Restore the multifactor, totality-of-the-circumstances analysis to determine whether a worker is an employee or an independent contractor under the FLSA.
- Ensure that all factors are analyzed without assigning a predetermined weight to a particular factor or set of factors.
- Revert to the longstanding interpretation of the economic reality factors. These factors include the investment, control and opportunity for profit or loss factors. The integral factor, which considers whether the work is integral to the employer’s business, is also included.
- Assist with the proper classification of employees and independent contractors under the FLSA.
- Rescind the 2021 Independent Contractor Rule.
Independent Contractors in Construction
Independent contractors or 1099 contractors are hired by a client for a specific task, and they control how and when they perform the task. Unless they self-perform, construction companies routinely work with a number of independent contractors like plumbers, electricians, HVAC techs, painters, the list goes on.
Hiring 1099 contractors helps construction companies complete jobs and they don’t require the typical paperwork that an employee does. Because 1099 contractors aren’t employees there’s no need to:
- Pay social security, Medicare, unemployment or workers’ compensation
- Offer health benefits
- Track and store hiring documents for compliance
The ease, and cost-efficiency, of hiring a contractor is why the misclassification of employees is such a big issue. Some companies misclassify workers on purpose to save on paperwork, taxes and paying overtime but others misclassify by mistake.
Deciding Factors Between Employees and Contractors
When deciding if you’ve hired an independent contractor or if the worker is an employee entitled to benefits and overtime under the FLSA, a big differentiator is the amount of control the worker has. An independent contractor has complete control over how and when the work gets done. An independent contractor typically negotiates work before it begins, noting when and where he or she will be able to complete the work.
The IRS notes that it can be difficult to determine the amount of control a worker has so it advises companies to follow common law rules. Common law rules aid businesses in sorting out the facts as to how much control and independence a worker has, helping to classify them as independent contractors or not. The facts fall under three categories:
- Behavioral: Does your company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by your company? These include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of your business?
Construction companies must weigh all the factors when deciding how to classify workers. The IRS stresses the keys are to look at the entire relationship, to consider the degree or extent of control and to document each factor to arrive at a determination. Also note that sometimes state laws override common law. In construction, the designation for specialty contractors is determined by state, and is sometimes counterintuitive.
Taking steps to classify workers correctly is important. Misclassifying your workers as independent contractors could make you liable for employment taxes. It can also include obligations to provide employee benefits, workers’ compensation, unemployment compensation, wage and hour liability and vicarious liability.
ExakTime’s Payroll Syncing can help make sure once you classify an employee, the classification doesn’t change between your workforce management system and your payroll package. See how quickly and easily employee information is exported directly into your payroll. Talk to an expert today.