The United States Department of Labor released a final rule outlining the criteria for classifying a worker as an independent contractor. The new rule is effective on March 11, 2024 and addresses six factors determining a worker’s classification:
- Opportunity for profit or loss
- Financial stake and nature of resources invested
- Degree of permanence of the work relationship
- Degree of control exercised by the alleged client of the worker
- Whether the work performed is essential to the alleged client’s business
- The worker’s skill and initiative
Responses to the Rule
Organizations objecting to the new rule argued that it would:
- Create confusion for employers
- Require additional time and resources for compliance
- Undercut workers’ abilities to work independently
The DOL reiterated that worker misclassification hurts workers by denying them protections and benefits of employment. It also hurts law-abiding employers that must compete against those that don’t play by the rules.
The new rule is expected to impact the gig economy, which has long been a misleading term by businesses attempting to create a hybrid classification of worker. In New York, Third Ear Conflict Resolution has been resolving worker misclassification penalties for decades. Our penalty resolution clients are typically confused employers who have taken the advice of accountants and business advisors who are equally confused. The bottom line is that there is no such hybrid classification in this state. Now, the US DOL is trying to make it clear that it doesn’t exist anywhere in the country.
Who Is An Employee?
On their websites, the DOL for the US and NYS each distinguish employees from independent contractors. I’ve also written about this for many years. Alarmists might want employers to panic and push back against the new rule, but there’s not really much that’s new in it. Most of us can spot an employee by:
- The ways they talk about their work. They talk about their bosses’ demands, not their clients.
- The structure of their work days. Employees tend to have work hours set by their employers.
- How they get paid. They often record their time and have a payday, or they are sent a portion of their annual salary on a pay schedule determined by someone else.
Who Is An Independent Contractor
In almost every penalty resolution matter I have resolved, where the NYS Workers Compensation Board has alleged worker misclassification, we have had to prove that workers were truly independent business owners with contracts. Here’s the criteria the Board uses:
- Free from direction or control
- Evidence of self-employment (e.g., Federal Employer Identification Number, business or self-employment income tax returns)
- Separate business establishment
- Services different from the work of the hiring business
- Provides the services for others
- Responsible for performing satisfactorily under a specific contract
- In a position to succeed or fail if expenses exceed income
- Has liability or other business insurance under its own legal business name and FEIN
- Has recurring business liabilities and obligations
- Advertises their own business or services
- Provides all equipment and materials necessary to fulfill the contract
- Works under their own operating permit, contract, or authority
Notice that it is similar to the US DOL’s new rule. At least in NY, the analysis is not new. If a business is hiring individuals and reporting their pay under social security numbers, there’s a good chance those workers are employees.
Why Do Employers Misclassify Workers?
Again, most of our clients made honest mistakes when they classified workers as independent contractors and the State disagreed. They often got bad advice from an accountant or other business advisor that understood the tax benefit of the classification, but that did not realize how different the legal analysis could be. Yet they admittedly liked the idea of saving other costs, too, such as:
- Minimum wage
- Overtime
- Safe and Sick Leave Pay
- Disability
- Workers Compensation
- Paid Family Leave
- Family Medical Leave
- Retirement Planning
- Unemployment
- Other Legal Protections (e.g., Non-Competiton, Waivers of Claims)
Why Do Mistakes Occur?
Employers must be able to reconcile the criteria of at least four different government agencies when determining whether to classify workers as independent contractors:
- The Internal Revenue Service
- The US DOL
- The DOL in each state where workers perform services
- The workers compensation agency in each state (or country) where workers perform services
It’s easy to get these wrong, especially when relying on non-legal advisors, including your own knowledge and experience.
How Much More Does an Employee Cost?
The additional costs might be less than employers think. We recommend you discuss the specific calculations for your workforce with an accountant or other financial advisor, but here’s a sample comparison.
Virtual Assistant as an Independent Contractor
Assume you hire a virtual assistant who is truly an independent contractor. She operates under a trade name, wrote the contract you signed to memorialize the terms of the agreement, gave you a W-9 form with a tax identification number, and works remotely when she wants using her own equipment and supplies. Experienced and business savvy, you do not have to train her. She is the expert and bases her pricing in part on how much money she needs to generate to cover her business and personal expenses. Each month, she invoices you for the number of hours she spent on projects for your business. Her hourly rate is $60.00, and she works approximately 10 hours per week.
Your monthly cost is $2,400.00. In terms of time and energy, you spend approximately 60 minutes per week communicating with her on project details and next steps. She makes your work easier, which keeps you energized for the work you do best.
Virtual Assistant as an Employee
Conversely, let’s assume you hired the VA as an employee, understanding that she did not:
- Operate a business
- Work for other clients
- Have a TIN or other small business tools
You figured you could train her and provide her with most of the equipment and supplies she needs to do the work. Smart and efficient, she doesn’t yet understand how businesses work. She just sees what you charge clients and assumes you keep most of the revenue. Tracking her time in a payroll application, you pay her weekly for the hours she records, and you payroll processing vendor ensures withholdings are accurate and payments are made to the appropriate government agencies. The vendor also tracks the hours she accumulates toward Safe and Sick Leave Pay. Her hourly wage is $25.00, and she reports 20 hours of work per week.
Your minimum monthly cost is $2,000.00. Adding your share of the payroll taxes and other benefits, the monthly cost is approximately $2,182.62. (This calculation varies wildly based on the industry you work in, where your VA will be physically located, and other risk considerations.)
- Payroll Taxes ($99.88)
- Accumulated Safe and Sick Leave Pay ($25.00; accumulates at a rate of one hour per 30 hours worked)
- Disability and Paid Family Leave ($37.32)
- Workers Compensation ($20.42)
Your greater costs are typically less tangible, such as time and income lost while training and managing her. It will usually take at least two weeks for you to train her to work independently. Depending on her education, experience, and commitment, it could take far longer.
Conclusion
There are benefits to each type of worker, but you aren’t likely to be the one who determines her classification. In NY, you will need to reconcile IRS, US DOL, NYS DOL, and NYS WCB criteria. The new US DOL rule changes very little for employers, employees, independent contractors, freelancers, self-employed persons, and sole proprietors in this state.
Need to check your work classifications?
Self-Audit Your Classifications Before the State Does It for You