If the worker falls back on their own method and knowledge, they are more likely to be an independent contractor. On the other hand, independent contractors typically have more freedom in how they complete their work. For instance, an electrician may choose what type of wire to use on a job and can set their own hours.
Both rules identify economic dependence as the “ultimate inquiry” of the analysis; both rules provide a non-exhaustive list of factors to assess economic dependence; and both rules caution that no single factor is determinative. Both rules also clarify that economic dependence does not focus on the amount of income the worker earns, or whether the worker has other sources of income. Under the FLSA, a worker is an employee and not an independent contractor if they are, as a matter of economic reality, economically dependent on the employer for work. The Supreme Court has explained that permitting employees to waive their FLSA rights would harm other employees and undermine the Act’s goal of eliminating unfair methods of competition in commerce. This final rule, announced on January 9, 2024, revises the Department’s guidance on how to analyze who is an employee or independent contractor under the Fair Labor Standards Act (FLSA).
The Employer-Employee Relationship
There’s no specific amount of money a worker needs to meet to prove they’re contributing significant investment in their work. However, independent contractors do spend independent contractor vs employee more money on tools and equipment than employees. If there’s an evaluation system assessing how work is performed, this points to classification as an employee.
If you believe that some of your workers are independent contractors, ask for a formal determination by writing to the address below. Remember that the real distinction between the employer-employee relationship and the independent contractor relationship depends primarily on the level of supervision, direction, and control exercised by the person engaging the services. The courts have found that no single factor or group of factors conclusively define an employer-employee relationship. Rather, all factors are reviewed to determine the degree of supervision, direction and control exercised over the services. Generally, an employer controls what will be done, i.e. the manner, means, and results.
Independent contractors vs. employees: The differences
The tests for independent contractors include several factors, and it’s important to note that there is no single deciding factor – all factors must be considered in the full context of a particular case. The problem is, of course, that employers can come to over rely on independent contractors and, over time, begin to treat them as employees. When this happens, big problems arise for the company despite any good intentions on their part or on the part of the contractor. If you have a reasonable basis for not treating a worker as an employee, then you may be relieved from having to pay employment taxes for that worker. To get this relief, you must file all required federal information returns on a basis consistent with your treatment of the worker. You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977.
The mission of the Department of Labor is to foster, promote and develop the welfare of the wage earners, job seekers and retirees of the United States; improve working conditions; advance opportunities for profitable employment; and assure work-related benefits and rights. Is there a topic or business challenge you would like to see covered on SPARK? The Biden Administration tried to withdraw the 2021 rule, but a federal judge ultimately decided that the 2021 rule went into https://www.bookstime.com/ effect on March 8, 2021, as planned by the Trump Administration. But to set yourself up for success, you’ll also need to think about your business name, finances, an operating agreement, and licenses and permits. The first three factors, listed below, are virtually the same as the Right to Control test. Receive insights from our specialists in a variety of areas and timely information on upcoming events directly to your inbox as they go live in our online Knowledge Center.
The law is clear
First, review those currently classified as independent contractors using the six-factor test and make any necessary adjustments to ensure proper classification. Second, review independent contractor agreements to ensure they clearly and properly outline the terms and conditions of the working relationship. An Economic Policy Institute report found that 10-15% of employers misclassify at least one worker as an independent contractor. Misclassified workers miss out on fair compensation, safety protection, the right to organize, and unemployment benefits. Sometimes, misclassification is a lack of due diligence on the employer’s side.
- You may discover that by law they are considered employees and that you are liable for unemployment insurance contributions and interest.
- Whether the relationship is one of employer-employee will depend on several factors.
- Common law principles further define independent contractor status by method of compensation.
- Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor.
- If you classify an employee as an independent contractor and you have no reasonable basis for doing so, then you may be held liable for employment taxes for that worker (the relief provisions, discussed below, will not apply).
- To get this relief, you must file all required federal information returns on a basis consistent with your treatment of the worker.