DOL clarifies independent contractor status

This month the DOL released a proposed rule intended to clarify how employers can determine if workers are employees or independent contractors. Misclassifying an employee as an independent contractor has grave consequences for employers. Penalties can go back for three years and be as much as 41.5% of the contractor’s wages, according to the Internal Revenue Service (IRS).

To make matters more challenging, the IRS and Department of Labor (DOL) have similar but separate guidelines to consider when classifying independent contractors, and some states have even more restrictive classification rules.

The proposed regulations introduce five distinct factors to determine a worker’s status. The first two of the five factors have the greatest impact on the worker’s classification determination:

1. the nature and degree of the worker’s control over the work,
2. the worker’s opportunity for profit or loss based on initiative or investment,
3. the amount of skill required or specialized training needed to complete the work,
4. the degree of permanence of the working relationship, and
5. whether the work is part of an integrated unit of production.

Below are examples of situational facts that would support an independent contractor classification as defined in the proposed rule:

1. The worker can set his or her own work schedule and accept work from others, including competitors.
2. The worker has the potential to earn profits or incur losses based on his or her management of the project.
3. The worker must possess a specialized skill to complete the work.
4. The worker is engaged in work for a defined period or sporadic timeframe.
5. The worker performs work outside the scope of the employer’s integrated production process and services.

For assistance making an independent contractor determination, contact our HR Consulting & Training division at 913.345.0440.