Are You SURE All of Your Workers Are Properly Classified as Employee or Independent Contractor?

In January of this year (2021), we told you that the United States Department of Labor (DOL) under the Trump administration announced a final rule clarifying the standard for whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). This rule reaffirmed the “economic reality” test as the primary factor for determining employee status. The final rule was published in the Federal Register on January 7, 2021 and the Rule was set to have an effective date of March 8, 2021.

However, shortly after the Biden Administration took over, they directed a "regulatory freeze" and delayed the effectiveness of the new rule until May 7, 2021. On March 11, 2021, Biden’s DOL announced plans to rescind the “Final Rule” on independent contractor status and invited comments from the public on the proposed rule through April 12, 2021. The Biden Administration’s stated reasoning for rescinding the Rule was that the “economic reality” test was not supported by the Wage and Hour Division of DOL, or by the text of the FLSA or applicable case law and signaled its intent to more strictly apply the worker classification analysis. On May 5, 2021, DOL announced the withdrawal of the Trump administration “Final Rule,” effective May 6, 2021 and DOL Secretary Marty Walsh issued the following statement regarding same:

“By withdrawing the Independent Contractor Rule, we will help preserve essential worker rights and stop the erosion of worker protections that would have occurred had the rule gone into effect…Legitimate business owners play an important role in our economy but, too often, workers lose important wage and related protections when employers misclassify them as independent contractors. We remain committed to ensuring that employees are recognized clearly and correctly when they are, in fact, employees so that they receive the protections the Fair Labor Standards Act provides.”

DOL’s landing page addressing worker classification under DOL remains largely unchanged from pre-Trump Administration status, and may be accessed here.

Fact Sheet 13, which may be accessed at the above link, makes it clear that the following factors are “…immaterial in determining whether there is an employment relationship:”

• the place where work is performed
• the absence of a formal employment agreement
• whether an alleged independent contractor is licensed by State/local authorities
• the time or mode of pay

Despite this Fact Sheet, we still recommend using a well-drafted Independent Contractor/Consultant Agreement in most cases and avoiding paying the worker/contractor in the same manner as you pay your w-2 employees, i.e., regular payroll schedule.

It is important to remember that properly classifying workers is not just an issue of federal law. We regularly assist clients in responding to state DOL audits and unemployment compensation claims regarding whether a worker who was classified as a 1099 consultant should have been treated as a w-2 employee. Below are some of the factors on which we see auditors focus:

• Does the worker who was classified as an independent contractor have his/her own Business, with a license, business cards, website?
• Does the worker advertise for business?
• Did the worker provide invoices and if so, were they on the worker’s own business letterhead?
• Do they have their own unemployment accounts?
• If they are in business for themselves, do they have a logo?
• Do they only work for one customer/business or more than one?
• Do they have a business EIN? It is often considered a RED FLAG when a worker uses their personal Social Security number as opposed to a business EIN.
• Did the business claiming the worker is not an employee require the worker to take a drug test or attend any specific training?
• Does the business alleging independent contractor status of the worker retain a right to control the worker, even if they do not exercise the control?

Many states follow the IRS’s traditional common law test, known as the “20 factor test,” to determine whether a worker is an employee or independent contractor. More information on how the IRS views this issue may be accessed here.

Based upon the extremely pro-Labor/employee centric focus of leadership in the Biden DOL, we anticipate that the classification of workers as 1099s will be a hot button item in the coming years, and more often than not, that workers will be found to be w-2 employees.

How Redstone GCI can Help

Redstone Government Consulting (Redstone GCI) has consultants and experts available to assist you in properly classifying your workers so that you can avoid the costly consequences of misclassification which may include back taxes to the IRS, state unemployment taxes, unpaid worker's compensation premiums, and even possible unpaid overtime or minimum wages, medical expenses, vacation and sick pay and other benefits. Redstone GCI is also available to assist contractors in assessing and determining applicable Human Resource compliance requirements and needs, including policy review, development and implementation as well as full suite of customized compliance training to be presented live or virtually. 

Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations in applying the multitude of regulations that come with being a Government Contractor.