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The Department of Labor Clarifies Who is an Independent Contractor in New Proposed Rule

The federal Department of Labor (DOL) released a Notice of Proposed Rulemaking (NPRM).

On September 22, 2020, the DOL released a NPRM regarding classifying a worker as an independent contractor (IC) or an employee under the Fair Labor Standards Act (FLSA). The analysis is essential as the “gig” economy continues to grow in the US amid the coronavirus pandemic, as more and more large companies start to rely on freelancers, or independent contractors,  rather than focusing on hiring long-term employees.

Independent Contractor or Employee?

Deciding whether to hire a worker as an independent contractor (IC) or an employee is a strategic step in a practice’s plan and raises questions of worker’s compensation, pension eligibility, wage laws, and other legal matters. Independent contractors take care of their own state, federal, and local withholding taxes, whereas employers must navigate this financial mess themselves if they hire full-time employees versus IC’s. For example, a private practice surgeon who hires an IC travel nurse won’t have to worry about tax withholdings, worker’s compensation benefits, etc.

Benefits, such as health, dental, life, and unemployment are major players in deciding whether to hire employees or independent contractors. IC’s are exempt from these employer benefit programs, worker’s compensation, and employment discrimination laws. Independent contractors work as their own boss on an as-needed or project-based basis for companies, while employees are hired to work for the business and rely on the company for salary, benefits packages, insurance, and more.

Problems occur within this umbrella when employers classify their employees as independent contractors, not distinguishing between the two vastly different entities, raising further issues within the practice dynamic. An optometrist might hire a new front office worker as an outright employee, but give decreased working hours in order to avoid paying for insurance benefits and other packages.

Recommended Reading

Independent Contractors: The Essential Guide

Suggested Changes

Proposed changes to the DOL’s rule provide a test to analyze if a person should be classified as an independent contractor or an employee. According to the Department of Labor: “The test considers whether a worker is in business for themselves (independent contractor) or is economically dependent on a putative employer for work (employee).”

The analysis provides two main factors of determining a worker’s classification: 

  1. The nature and degree of the worker’s control over the work, for example controlling how an associate dentist treats patients and setting their schedule for them.
  2. The worker’s opportunity for profit or loss based on initiative and/or investment.

The Department of Labor lastly concluded that the proposed rule clears up the fact that employers should evaluate “actual practice” over what might be “contractually or theoretically possible”. The classification process also outlines three other factors in the DOL proposal: 

  • The required skill for the work.
  • The degree of permanence between the worker and potential employer.
    • Example: If you hire a bookkeeper on full time for an indefinite amount of time.
  • Whether the work is an integrated unit of production.

Seeking Comments on the Proposed Rule

The Department of Labor will soon be seeking comment on their proposed rule, once it is published in the Federal Register. For 30 days, businesses and the general public will be able to provide their feedback and opinions on the new rule, allowing the DOL to consider these suggestions, negative feedback, and criticism, making any final edits to the rule before its proposed release date.

Employers should look at these developed guidelines in classifying between IC’s and employees since the new rule would allow for easier classification.  These new rules are a great step in finally classifying an independent contractor and an employee, allowing employers the freedom to hire either one based on their company’s needs and understanding the differences between the two to lower any hindrance to future employee issues.

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