The Obama Administration has released a set of new classifications that will dramatically affect the determination of who can be considered an independent contractor, also known as a “1099 worker.” This new determination represents a significant change and has the potential to dramatically affect the number of workers who can accurately and legally be classified as independent contractors.
Previously, the U.S. Department of Labor (DOL) had relied largely on a “control test” to determine whether an independent contractor is truly independent or is a de facto employee and thereby subject to benefits, overtime and other workplace protections. Under the previous interpretation, if the contractor “controlled” most aspects of the work themselves — the location, the process, the timing, the price, etc. — she or he would likely have been appropriately classified as an independent contractor.
The new guidelines, which are now in effect, downplay the control test and focus instead on “economic dependence,” which means the degree to which the duties performed by the contractor are both essential to the employer’s business and constitute a majority of the contractor’s income. More specifically, DOL’s new interpretation relies on six interrelated factors:
- The extent to which the work performed is an integral part of the employer’s business.
- The worker’s opportunity for profit or loss depending on his or her managerial skill.
- The extent of the relative investments of the employer and the worker.
- Whether the work performed requires special skills and initiative.
- The permanency of the relationship.
- The degree of control exercised or retained by the employer.
Using these new factors, employers are cautioned that there is no clear determination of whether a worker is or is not truly “independent.” Instead, an employer must look at the answers to all (and not just some) of the above factors in making a qualitative determination. In other words, employers must now struggle to make a subjective determination when hiring independent contractors.
What Employers Should Do
Our best advice is for employers to look carefully at their independent contractor relationships. You need to be mindful that the Dept. of Labor is making a concerted push to ensure that most workers are classified not as contractors but as employees. Accordingly, your use of independent contractors should be as limited as possible and should be closely evaluated on an ongoing basis in order to avoid risking the significant penalties, back wages and back taxes associated with misclassifications.
Here are a two common questions we are getting about this new rule:
Q: We hire Independent Contractors for [X] positions in our company. Can we no longer do so?
Unfortunately, we cannot make those determinations unless we assess each contractor situation. At Affinity HR Group, we are in the process of assessing each and every one of our own contractors under the new rules to determine whether they continue to satisfy the new requirements. Alas, there is no “general rule” that we can apply. Each contractor situation has to be evaluated against the new standards.
Q: Are the Feds going to audit me if I don’t make this change?
It depends. Most audits take place because a disgruntled ex-employee files a claim. If you have low-wage employees whose situation would be improved by being classified as employees instead of contractors, then yes, you are at risk. But what if you have, for example, salespeople who are happy with the independence that their contractor status brings them — they are not likely to sue, so what’s the risk? Well, there could be some risk in your reporting to the IRS, which itself maintains a set of standards to determine who qualifies as an Independent Contractor. Prior to the recent change in standards, the IRS and the DOL interpretations were very similar. If the IRS changes its standards to become more in line with the DOL, then you will be at risk every time you file your taxes and report on your 1099s.
Claudia St. John is President of Affinity HR Group and a Strategic Partner of the HRGroup, a provider of Human Resource support services, including hiring practices, compensation programs, talent development and more. For additional info, or to suggest a topic for a future article, please email [email protected].
