New Rules on Employee/Contractor Classification Proposed

Classifying a worker as an employee or independent contractor has long been a complicated task for employers, with significant consequences. Misclassification can result in fines and penalties, and, in some cases, employers may be required to pay back wages and taxes to a worker who is reclassified as an employee.

Now the U.S. Department of Labor (DOL) is proposing simplified standards on which to judge the status of a worker. In late September the DOL announced proposed changes to the rules addressing how to determine whether a worker is an employee under the Fair Labor Standards Act (FLSA) or an independent contractor.

The DOL proposes to:

  • Adopt an “economic reality” test to determine a worker’s status as an FLSA 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. These factors help determine if a worker is economically dependent on someone else’s business or is in business for themselves;
  • Identify three other factors that may serve as additional guideposts in the analysis including: 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; and
  • Advise that the actual practice is more relevant than what may be contractually or theoretically possible in determining whether a worker is an employee or an independent contractor.

If adopted, these new guidelines will help make the classification of a worker a more clear and distinct process. There is a brief 30-day comment period before the DOL acts to make the rules permanent. The DOL cited “The lack of regulatory guidance underscores the need for an expedient rulemaking” as a reason for the quick action.

If you have questions about worker classification, please contact Gray, Gray & Gray at (781) 407-0300.

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