RGCI - 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.

Learn More About Our  Human Resources Consulting Services

Written by Jamie Brabston

Jamie Brabston Jamie Brabston is a Director/Senior Legal Consultant with Redstone Government Consulting, Inc. (Redstone GCI), specializing in Labor and Employment Law, with an emphasis on government contract law and compliance. Prior to joining Redstone GCI, Jamie was Senior Counsel with Lehr Middlebrooks Vreeland & Thompson, P.C., a boutique labor and employment law firm based in Birmingham, AL. Jamie assists employers with compliance, problem prevention, the analysis of complex employment law and contract related issues, as well as conducting investigations related to all types of employee complaints. In addition, Jamie works with employers in responding to complaints filed with external agencies such as the Equal Employment Opportunity Commission, the United States Department of Labor (Wage & Hour, OSHA and the OFCCP), as well as state Departments of Labor. Jamie also provides litigation support as needed. In addition, Jamie advises federal government contractors with contract specific requirements such as affirmative action compliance, Service Contract Act and Davis Bacon, FAR requirements for ethics policies and awareness programs, the Drug Free Workplace Act and related record keeping. Jamie often assists contractors in performing mock compliance assessments to ensure they are prepared in the event of an audit or investigation. Jamie is a proficient trainer and speaker and is a primary instructor for the Federal Publications Seminars course, “HR for Government Contractors.” Additionally, Jamie regularly conducts training and education for individual employers and their employees on non-discrimination and anti-harassment, as well as training sessions for executive and non-executive management on a wide variety of overall management leadership skills, and government contract specific topics. Jamie also specializes and advises clients on employee benefits issues including ERISA welfare benefit plans, HIPAA, wellness plans, COBRA, the Affordable Care Act, and other federal and state laws, including related reporting requirements. Professional Experience In addition to her experience with Lehr Middlebrooks Vreeland & Thompson, P.C., Jamie was an attorney and shareholder with Huntsville, AL based law firm, Lanier Ford Shaver & Payne from 1994– 2006, where she defended large and small employers, including government contractors, in litigation involving sexual harassment, retaliatory discharge, disability, age, religion, race and sex discrimination, FMLA, ERISA, invasion of privacy, negligent supervision, intentional infliction of emotional distress, fraud and breach of contract. From 2006- 2009, Jamie served as General Counsel, Vice President of Human Resources, and Corporate Secretary for Digital Fusion, Inc., a Huntsville based government contractor. In 2009, Jamie founded her own employment law compliance firm, Practical Employment Solutions, Inc., where she partnered directly with small businesses, including government contractors, to assist them with a full range of human resource and employment law compliance needs specifically targeted to prevent and correct employment law and other compliance issues before governmental audits, investigations or litigation occurred. Jamie has also represented government contractors with restrictive covenant issues, and defended a mid-size, Virginia based contractor in a lawsuit involving allegations of violations of non-competition agreements and misappropriation of trade secrets.

About Redstone GCI

Redstone GCI is a consulting firm focused on fulfilling the needs of government contractors in all areas of compliance. With a singular mission to help contractors through the multiple layers of “red tape,” we allow contractors to focus on what they do best – support their mission with the U.S. Government. We are home to a group of consultants made up of GovCon industry professionals, CPAs, attorneys, and retired government audit and acquisition professionals.

Our focus and knowledge of audit and compliance functions administered by DCAA and DCMA will always be at the heart of what we do. However, for the past decade, we’ve strategically grown to support other areas of the government contractor back-office with that same level of focus and expertise. We’ve added expertise in contracts management, subcontract administration, proposal pricing, various software systems, HR and employment law, property administration, manufacturing, data analytics/reporting, Grant specialists, M&A, and many other areas. When we see a trend in the needs of contractors, we act to ensure we can provide the best expertise in the market to fulfill those needs.

One thing our clients can be certain of is that with the Redstone GCI Team in your corner, there is no problem too big and no issue too technical for our team to tackle.

Topics: Compliant Accounting Infrastructure, Employee & Contractor Compensation, Human Resources