If you’ve ever engaged with independent contractors for a project, you likely understand how difficult and confusing worker classification can be in the United States.
Here at Veryable, we’ve spoken to many businesses worried about the risks of working with independent contractors, due to confusion about how the regulations in place would apply to them.
Thankfully, the U.S. Department of Labor (DOL) has proposed a new rule making it easier for businesses to work with independent contractors. The regulation is expected to become final in early 2021. The new, streamlined approach to determining independent contractor status would enable businesses to engage independent contractors without the fear and uncertainty of misclassification risk.
The risk of an independent contractor being misclassified as a full-time employee has prevented many businesses from engaging with independent contractors in the past. These businesses feared they might face legal consequences after working with an independent contractor who is retroactively classified as an employee, resulting in unforeseen costs to the business.
The DOL’s proposed regulation is intended to clarify how worker classification will be determined. It provides an update to the test applied by the DOL when making decisions about worker misclassification claims. With the new regulation, the DOL acknowledged that the old test has become less clear and consistent over time as decisions have been made on a case-by-case basis. The new way of determining worker classification is an attempt to “benefit workers and businesses and encourage innovation and flexibility in the economy,” according to the DOL.
In the new regulation, the question is whether the worker is economically dependent on a particular individual, business, or organization for work. To determine a worker’s “economic reality,” the DOL directs us to focus on two factors:
- The nature and degree of the worker’s [economic] control over the work; and
- The individual’s opportunity for profit or loss
In the past, the employment classification analysis involved many factors without guidance on which factors should weigh more. This new regulation simplifies the analysis by directing our focus to only two factors in determining a worker’s classification.
Below, you’ll learn what each factor of the new DOL regulation means in further detail, and how the DOL’s new attitude toward worker classification would affect the future of independent contractors in the workforce.
Factor one: worker’s control
It is crucial to remember that in this new regulation, the DOL is focused on economic control, not control of the work itself. This is important because it allows a business to keep a certain degree of supervisory/quality control over the work in question without disrupting the worker’s classification as an independent contractor.
Factor one of the new test involves analysis of “the nature and degree of the worker’s [economic] control over the work."
According to the new regulation, “This factor weighs towards the individual being an independent contractor to the extent the individual, as opposed to the potential employer, exercises substantial control over the following key aspects of the performance:
- setting his or her own work schedule,
- choosing assignments, and
- being able to work for others, including a potential employer’s competitors.”1
Factor two: opportunity for profit or loss
Factor two is all about the worker’s opportunity for profit or loss. The DOL provided two subfactors, either of which can meet the second factor’s requirements for an independent contractor.
According to the new regulation, “This factor weighs towards the individual being an independent contractor to the extent the individual has an opportunity to earn profits or incur losses based on either or both:
- the exercise of personal initiative, including technical skill; and/or
- the capital expenditure on, for example, equipment or material.”2
This means that if the individual meets just one of these subfactors by exercising personal initiative or spending their own money to do the work they agreed to, they meet the second factor for being considered an independent contractor.
How this affects independent contractors in the workforce
In the new regulation’s supplementary information, the DOL strongly endorses the continued reliance upon independent contractors in the market stating,
“There are real benefits to the use of independent contractor status, for both workers and employers. Independent contractors generally have greater autonomy and more flexibility in their hours, providing them more control over the management of their time. The use of independent contracting for employers allows for a more flexible and dynamic workforce, where workers provide labor and skills where and when they are needed. Independent contractors may more easily work for multiple companies simultaneously, have more control over their labor-leisure balance, and more explicitly define the nature of their work. Independent contractors also appear to have higher job satisfaction.”3
For these reasons, the DOL’s proposed regulation would be a win for independent contractors and businesses alike. It is exciting to see regulatory action in support of businesses and independent workers who prefer the growing movement toward flexible labor options.
Why businesses choose independent contractors
Business needs change rapidly in today’s unpredictable marketplace. In light of the proposed changes to make regulations clearer, it’s a great time to explore how you can optimize your labor for more competitive operational efficiency.
If you are considering engaging with independent workers for your manufacturing, supply chain, or logistics operations, read our article explaining what on-demand labor is, how it works, and how it could make your business more efficient.
- 29 C.F.R. § 795.105(d)(1)(i)
- 29 C.F.R. § 795.105(d)(1)(ii)
- 85 FR 60636