One of the most critical tasks for an employer is properly classifying individuals who work for them. Distinguishing between an employee and independent contractor is a vital piece of running your business, that if done incorrectly, can have severe implications for the employee and employer.
Proper classification ensures:
- Compliance with regulations and labor laws;
- Your workers understand the extent of their benefits and entitlements;
- Clarity in the employment relationship; and
- And a clear-cut understanding for the worker of their role and responsibilities within the company.
The legal landscape of worker classification can be daunting, but remains an imperative piece of running your business. Fortunately, NFIB has developed a guide to ensure that you can confidently distinguish your workers between employees and independent contractors, and hopefully avoid any future fines and penalties.
The Department of Labor’s New Independent Contractor Rule
With the Department of Labor’s (DOL) new independent contractor rule going into effect this past March, it is more important than ever that employers assess their worker classifications. The new rule now applies a less-clear “totality-of-the-circumstances” analysis. This “totality-of-the-circumstances” test increases the number of factors that determine a worker’s classification and makes it harder to classify a worker as an independent contractor.
You can find a detailed breakdown of these factors in NFIB’s blog post on DOL’s new independent contractor rule here
NFIB’s Guide to Independent Contractors
NFIB’s newest Guide to Independent Contractors can help you assess and determine the classification of your workers. The guide goes over defining the categories of workers, how to avoid misclassification, the consequences of misclassification, and much more.
In addition to the legal obligations of classifying your workers, businesses also need to consider the unique administrative differences associated with each classification. NFIB’s guide discusses the distinct administrative differences between employees and independent contractors, such as:
- Training responsibilities;
- Liability;
- Pay;
- Tasks;
- Benefits; and more.
The Different Tests: What Are They and Who Uses Them?
NFIB’s Guide to Independent Contractors contains an extensive overview of the three different tests used to determine employee classification. These tests are:
- Common Law Test: Used by the IRS and some state agencies. This test looks at 20 different factors to determine whether a worker is an employee or independent contractor. The crux of this test is how much control the business has over the worker.
- The Totality-of-the-Circumstances Test: Used by the Department of Labor. This test looks at a non-exhaustive list of considerations to determine whether the worker is economically dependent on the employer for work.
- The ABC Test: Used by two-thirds of the states. This test is the clearest of all three tests, requiring a worker to satisfy just three factors to be an independent contractor.
NFIB’s Guide also includes an application of these three tests to different situations, which will help small businesses apply the tests to their own unique situations.
The Risks of Misclassification
Even if unintentional, misclassifying a worker comes with significant consequences, including fines and penalties.
- Legal Consequences
- Misclassification can lead to lawsuits and legal penalties imposed by the DOL for violating labor laws pertaining to minimum wage, overtime, and others.
- Back Pay and Benefits
- Misclassified workers may be entitled to back pay for unpaid wages, overtime, and benefits that they otherwise would have been entitled to if they were properly classified.
- Tax Penalties
- Operational Disruption
Worker classification is an important task to keep your business running smoothly. Let NFIB’s new Guide to Independent Contractors help you ensure your employees are properly classified.
For general questions on classifying your employees, you can reach out to [email protected]
Neither this blog post nor NFIB’s Guide to Independent Contractors should be taken as formal legal advice. If you are engaged in a lawsuit or are navigating penalties as a result of misclassification, you should consult with an attorney licensed in your state.
