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Rule on Independent Contractors from the Department of Labor

November 18, 2022

Written by Complete Payroll

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The Department of Labor (DOL) has recently published a new proposal to the requirements that allow employers to declare certain workers employees and others independent contractors. This new proposal could affect your business directly if you rely on short-term contract workers for your business's day-to-day operations.

What is the Current Rule?

In 2021, under then-President Trump, the DOL issued a regulation that emphasized two factors - control over work and opportunity for profit - instead of the six guidelines previously considered in defining an independent contractor. 

Because of this change, companies had greater flexibility in who they considered an employee and who they considered an independent contractor. The designation is huge in that under the Fair Labor Standards Act (FLSA), people considered employees are legally entitled to minimum wage, overtime pay, and other benefits. Independent contractors are not entitled to these benefits, which are real savings for companies.

The New Proposed Rule

Under the new rule proposed by the DOL, employers would not weigh control over work and opportunity for profit more than any of the other factors in the totality-of-the-circumstances analysis. All factors would be weighed equally and would also include:

  • The number of skills that are needed to complete the work
  • How permanent the working relationship is
  • How much the worker has invested in equipment or materials required for their job
  • How essential the employee’s part is in the running of the employer’s business

This new proposed rule is seen as more pro-employee than the current rule. However, it’s still good news for employers who use independent contractors since this avoids using the ABC Test under the FLSA. Some states require this test which deems a worker an employee until they can prove things about their employment, such as that they are free from control or perform work that is usually outside of the hiring entity’s business. 

How Does This Affect the Gig Economy?

Any new regulations on independent contractors will impact the gig economy - a labor market comprised of short-term contracts or freelance work as opposed to full-time employees. Companies that use a gig economy model include companies like Uber and Lyft, DoorDash, and Airbnb. 

This new regulation will make it more difficult for employers to classify their workforce as independent contractors and not full-time employees. That could mean a significant cost increase for many businesses as they now must provide pay and benefits to employees previously classified as independent contractors. 

The DOL published the proposed rule in its entirety on the Federal Register on October 13. Employers and employees can comment on the new proposal for 45 days after its publication.

For updates on this new proposal or information on HR and payroll that could affect your business, visit the Complete Payroll blog

DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting, or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.

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