Our clients are looking for flexibility and cost savings during these tough economic times as they work to recover from the pandemic and rebuild their businesses. It is more important than ever for employers to understand both the benefits and liabilities of utilizing a flexible workforce that includes independent contractors, 1099s and freelancers to drive business results.
Compliance issues already exist, and this is an area the IRS has been laser focused on for a while. The new guidance is welcome; let’s review it in light of recent employment trends.
On January 6, 2021, the DOL announced a final rule clarifying the standard for employee versus independent contractor under the FLSA. The effective date of the final rule is March 8, 2021. The final rule:
- Reaffirms an “economic reality” test to determine whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee).
- Identifies and explains two “core factors” that are most probative to the question of whether a worker is economically dependent on someone else’s business or is in business for him or herself:
- The nature and degree of control over the work.
- The worker’s opportunity for profit or loss based on initiative and/or investment.
- Identifies three other factors that may serve as additional guideposts in the analysis, particularly when the two core factors do not point to the same classification. The factors are:
- The amount of skill required for the work.
- The degree of permanence of the working relationship between the worker and the potential employer.
- Whether the work is part of an integrated unit of production.
- The actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
The DOL hopes that streamlining and clarifying the test to identify independent contractors will reduce worker misclassification and litigation. It remains to be seen whether president-elect Joe Biden’s administration will permit the final rule to take effect, or whether it could be rejected under the Congressional Review Act since the Senate majority has now changed. In addition, the independent contractor standard under other federal laws and some state laws also need to be considered for compliance.
Reach Out To Us: We understand what’s driving the rise in “on-demand” labor and the headache that comes with 1099 compliance. Let us help you meet those challenges so you can capitalize on the benefits of a flexible workforce to rebuild your business.
