If your company uses independent contractors, you have probably noticed the confusion surrounding when and how to use that classification for the past few years. On January 7, 2021, the Wage and Hour Division of the Department of Labor (DOL) issued a final ruling regarding the interpretation of workers classified as independent contractors under the Fair Labor Standards Act (FLSA). This blog discusses the final ruling initially scheduled to take effect on March 8, 2021. However, the DOL recently postponed the effective date to May 7, 2021.
The Economic Reality Test Under the Independent Contractor Rule
One purpose of the new legislation was to clarify whether the person performing the independent work is economically dependent on a business to provide work. If so, that company should classify the worker as an employee according to regulations in the FLSA. The final release of the Independent Contractor Rule provides the criteria indicated below to help businesses make this determination.
- The nature of a person’s work and how much control a company has over it.
- The opportunity of workers to incur profit or loss according to their investment of time and resources into the project.
Should business owners come to different conclusions after evaluating each factor, the recent legislation provides three additional pieces of guidance to help make the right determination. These include:
- The degree of skill the person must have to complete the work.
- Whether the work performed by the independent contractor is part of an integrated production unit within the company.
- How much permanence exists between the person completing the work and the business contracting for it.
The purpose of evaluating these criteria is to determine whether people performing work as a non-employee for a company are in business for themselves or performing work more for the benefit of the business.
Business Obligations When Paying Independent Contractors
Employers must pay non-exempt employees at least the minimum hourly wage and one and one-half times the hourly wage for all hours over 40 in one week. Employers must also keep records of the hours worked and the amount of pay each employee receives in a year. The requirement extends to employers sending employees a W2 statement at the end of each year that employees need to file their annual federal and state income tax returns.
Since independent contractors are not employees, the rules regarding minimum wage and overtime pay do not apply to them. Businesses also do not need to keep the same records for independent contractors that they do for employees.
The only paperwork the FLSA requires companies to send to non-employees is a 1099 miscellaneous income statement at the end of the year. However, this only applies if the independent contractor earned $600 or more in a calendar year from the business. Non-receipt of a 1099 form does not release the independent contractor from reporting the income to the Internal Revenue Service (IRS).
Do you have questions about how the final Independent Contractor Rule will affect your business? Counting House can help. Please contact our office to request an appointment.