If you work with contractors, now is a good time to double-check your classifications. As of January 2024, the Department of Labor is using a more expansive “economic realities” test that makes it easier for workers to be considered employees. This approach requires a totality-of-the-circumstances analysis—meaning all factors must be considered together, with none carrying more weight than the others. The following six factors guide the determination of whether a worker is an independent contractor or an employee:
- The degree to which the employer controls how the work is done.
- The worker’s opportunity for profit or loss.
- The amount of skill and initiative required for the work.
- The degree of permanence of the working relationship.
- The worker’s investment in equipment or materials required for the task.
- The extent to which the service is an integral part of the employer’s business.
Misclassification Risks and Liabilities
Misclassification can carry significant legal and financial risks. Employers may be liable for unpaid wages, back taxes, and missed benefits, in addition to penalties under federal and state laws. Employees are entitled to protections and benefits that independent contractors are not, such as minimum wage and overtime under the Fair Labor Standards Act (FLSA), anti-discrimination laws, and leave entitlements. Treating a contractor like an employee—intentionally or not—can result in lawsuits, IRS penalties, and liability for workers’ compensation and unemployment insurance.
Best Practices for Compliance
To ensure workers are properly classified, HR should play a key role in staffing decisions. Independent contractors may be a smart choice for short-term projects or specialized tasks, but employers must ensure the relationship is legally sound. Proactive steps include:
- Involving HR early in the classification decision
- Using written independent contractor agreements containing language that helps establish the classification as an independent contractor
- Adopting a formal policy and checklist for contractor use
- Requesting proof of tax compliance
- Avoiding treating contractors like employees, but ensuring that they do understand and adhere to the organization’s policies and procedures.
When in doubt, seek professional HR or legal guidance to protect your organization. aHRrow can help your business properly classify employees and independent contractors by conducting a thorough review of job roles and applying legal tests, reducing the risk of costly misclassification penalties.