Understanding how to classify your workers as either employees or independent contractors is fundamentally important for every business. Proper classification will ensure your business is in compliance with the Fair Labor Standards Act (FLSA) and the US Department of Labor (DOL).
WHY IS PROPER CLASSIFICATION IMPORTANT?
Misclassification of workers can lead to severe legal liabilities and financial penalties for business owners. These potential liabilities include:
Minimum Wage and Overtime Pay: Misclassifying an employees as independent contractors could lead to violations of the FLSA’s minimum wage and overtime pay requirements. Businesses found to be in violation may face backpay claims, fines, and legal expenses.
Tax Obligations: Businesses are responsible for withholding income taxes, Social Security, and Medicare taxes from employees’ wages, but not for independent contractors. Thus, misclassification can result in tax evasion charges and penalties from the Internal Revenue Service (IRS).
Unemployment and Workers’ Compensation Insurance: Employees are entitled to unemployment benefits, and workers’ compensation insurance in the event of job loss or workplace injuries. Therefore, misclassifying employees as independent contractors may expose businesses to lawsuits and fines related to workplace injuries.
RETURNING TO THE PRE-2021 RULE
In 2021 the Trump Administration implemented a new rule for examining whether a worker is an employee or independent contractor. In particular, the 2021 rule focused on two core factors of the business-worker relationship: (1) the nature and degree of control the business has over the worker, and (2) the opportunity for the worker to gain profit or experience a loss. The 2021 rule also prohibited considering whether the work performed is central or important to the business. This rule tended to favor conclusions that the worker is an independent contractor.
Beginning March 11, 2024, the DOL is going back to its pre-2021 test for reviewing employees and independent contractor classifications, which will also bring the DOL’s test in alignment with how courts evaluate this same issue.
THE NEW (OLD) RULE’S IMPACT
The DOL is now essentially returning to the “economic reality test” to evaluate the nature and control of the work relationship between the business and worker. A variety of factors are considered under this approach, including (1) the worker’s ability to make or lose money, (2) investment in tools, (3) duration of engagement, (4) control over work, (5) importance or centrality of the work to the business, and (6) level of independence for the work.
Proper classification of employees is essential for businesses to protect themselves against potential liabilities. With the DOL’s change in its approach, now may be the opportune time for you to review how your business classifies its workers to make sure it passes the “economic reality test”.
For assistance with classifying your workforce or addressing other business needs, please contact Ser & Associates at (305)-222-7287 or [email protected]. Also, be sure to visit our website or follow us on social media for updates and insights on optimizing your business practices.
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