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The Rules on Independent Contractors Change Again!

Independent ContractorsThe rules for deciding who is really an independent contractor and who must be classified as an employee are changing again.  If your business issues 1099s, prepare to take another look at your independent contractors (ICs) in the context of the new rules.

The new rules follow a lengthy rulemaking process at the U.S. Department of Labor (DOL) and will become effective on March 11, 2024.  The new rules do not “grandfather” prior IC relationships.  If you have existing ICs, your IC relationship with them will be tested under the new rules.

The new rules reflect a shift from existing IC rules that were adopted in 2021 and gave greater weight to two factors in determining IC status:  control over the work and the IC’s opportunity for profit or loss.

The new rules return to a six-factor “economic realities” test.  Under the new rules, none of the six factors is assigned greater weight than the others and the analysis will depend on the “totality of the circumstances.”  In addition, the focus will be on whether a worker is “as a matter of economic reality . . . economically dependent on an employer for work . . .  or in business for themself.”

The six factors to be used for the economic realities test are:

  1. The worker’s opportunity for profit or loss depending on their managerial skill.
  2. The investments made by the employer and the worker (with worker investment that is capital or entrepreneurial in nature favoring IC status).
  3. The degree of permanence of the working relationship.
  4. Who controls how the work is done.
  5. The extent to which the service rendered is an integral part of the employer’s business.
  6. The amount of skill and initiative required for the work (and whether those skills contribute to “business-like initiative” by the worker).

The new IC rules note that other factors also may be considered.

Employers’ liability risks from the incorrect classification of workers are significant.  Incorrect classification of workers as ICs can expose employers to liability for failure to make employee tax withholdings and employer payroll tax contributions, wage-hour compliance failures (potentially including liability for overtime pay), and liability for failing to offer employee benefits to misclassified workers.

McMillan Metro Faerber, P.C.’s employment attorneys can assist with navigating requirements under the new IC rules.  Contact us with any questions about preparing for compliance with the new rules.