The rules around classifying 1099 contractors are changing

Heads up! New rules regarding independent contractors could be coming to target worker misclassification

There are a variety of employers who work with independent contractors, but soon, there may be a new set of rules under the federal Fair Labor Standards Act (FLSA) that will define who qualifies as an independent contractor. This will be a massive shift, but don’t worry–– read on to see exactly what this proposed law would change and what you need to do to make sure that you won’t lose your independent contractors.

Who qualifies as an independent contractor right now?

Under the current rules, an individual is an independent contractor if the employer has the right to control the result of the work they do, but not how or when it is done. In simplest terms, an independent contractor is self-employed.

Some other current specifics for independent contractors are that they provide their own tools and materials for the work, have the capacity to accept or refuse assignment, file taxes on their own, and can submit bids.

With these current rules, many workers can qualify as independent contractors. And companies thrive off of them. Businesses such as Uber and Doordash rely on independent contractors in order for their company to function. Every single one of the drivers can set their own hours, choose how the work gets done, has the capacity to accept and refuse assignments, and provides their own materials for the work. While being an independent contractor may not seem too impactful while employed at a company such as this, an Uber driver that relies on the income made from driving may get unexpectedly laid off due to bad reviews or something of that sort. Since they were an independent contractor, Uber does not owe them anything, and they do not qualify for unemployment as a recently laid off W2 employee would.

What is changing and why?

Last month, The Federal Department of Labor (DOL) proposed a set of new rules for independent contractors. These potential laws target the gig economy, making the “employee” umbrella bigger and the “independent contractor” umbrella smaller. This would help independent contractors integral to making a company function that aren’t provided with W2 contract protection (minimum wage, overtime pay, unemployment, and other benefits). At the end of the day, these proposed rules are trying to give independent contractors more rights by making them employees, combating employee misclassification.

According to the DOL News Release on the proposed rules, “Misclassification is a serious issue that denies workers’ rights and protections under federal labor standards, promotes wage theft, allows certain employers to gain an unfair advantage over law-abiding businesses, and hurts the economy at-large.”

The proposed law would make it more difficult to classify an individual as an independent contractor, and will form a “totality of circumstances” to determine the classification, rather than having one or two rules hold significant weight.

The New Rules

The proposed rules will look at six major factors.

• Opportunity for profit or loss - can the worker negotiate their rate?
• Investments by the worker and the employer - are independent contractors materials and tools purchases capital or entrepreneurial?
• Degree of permanence of the work relationship - is the relationship continuous or non-exclusive?
• Nature and degree of control - can your contractors set their own hours and work unsupervised?
• Extent to which the work performed is an integral part of the employer’s business
• Skill and initiative of workers - do the contractors use speciality skills in their work? can they complete their work without employer training?

How this will affect smaller businesses

While this proposal may do good for vulnerable, misclassified workers, it has huge implications for small businesses that use independent contractors for flexible work and consulting.

For entrepreneurs, this may negatively impact the work available for them as independent contractors to small businesses. For small businesses, it will become more difficult to employ independent contractors for work.

What will you want to think about leading up to this change?

If these proposed laws were to be enacted, here are some things employers should be thinking about to make sure they don’t lose their independent contractors:

- Do you choose your independent contractor’s rates/make them impossible for negotiation?

• If so, consider being more flexible. The opportunity for profit or loss will be a factor in whether or not your independent contractors stay in that classification.

- Do your independent contractors rely on your materials and tools to do their jobs?

• If so, enforce that they supply their own. If this isn’t changed, they may be reclassified as employees under the new laws.

- If they do supply their own tools and materials, did they purchase them specifically for this contract?

• If so, this is not enough to be an “entrepreneurial purchase.” Even though they are supplying their own tools, if they are bought specifically for this job/contract, they will be considered a “capital purchase.”

- Is the work relationship between you and your independent contractors continuous or indefinite in duration?

• If so, this classifies the contractor as an employee. Be careful on this one, as this rule is a little bit complicated. If there is a lack of permanence in the work, but it isn’t due to the workers own initiative, that still doesn’t make the worker qualify as an independent contractor.

- Do you set the hours for your independent contractor, supervise them as they work, or limit their ability to work for others?

• If so, make a change! Doing any of these things will classify your independent contractors as employees.

- Is the work your independent contractors perform crucial to your business?

• If so, your independent contractors may be classified as employees under the new rules. Make sure that your business could still function without your independent contractors, and you will be good on this rule.

- Do your independent contractors use specialized skills in their work? Do they rely on training from you to complete their work?

• If they don’t use specialized skills or if they rely on your training, they may be classified as employees. Make sure that all of your independent contractors meet this requirement.

Should you be worried if you are someone who employs independent contractors?

While the new rules will make it more difficult for independent contractors to keep their classification, it does not make it impossible! Don’t brush off this new change, but if it comes, there is no need to panic. As long as you focus on meeting the new requirements, your independent contractors will stay just that.