Worker classification sounds boring until it becomes big news. Like back in 2020 when businesses like Uber and Lyft were fighting in court over whether drivers are classified as employees or independent contractors. Uber and Lyft won their legal battles to classify drivers as independent contractors. Good news for them – classifying workers as independent contractors saves businesses money in employer payroll taxes and other employee-related expenses. On the flip side, the independent contractors assume more costs, like self-employment taxes and health benefits.
Employers have always tried to push the rules to their limit; but, as you can imagine, worker classification issues have gotten bigger as the gig economy has exploded. That means an explosion in the confusion about worker classification among employers and workers. So, about a year ago, the U.S. Department of Labor (DOL) stepped in to help everyone comply with applicable tax law by issuing a final rule to clarify the standards for when a worker should be considered an employee or an independent contractor.
Three things that employers and workers should know about the final DOL rule:
- An “economic reality” test is used to determine whether a worker is an independent contractor or is “economically dependent on an employer for work” (i.e., an employee). The rule defines two “core factors” to help businesses determine whether a worker is economically dependent on someone else’s business or is in business for her- or himself.
- The first core factor isn’t just one thing; it relates to a series of conditions, including the degree of control of the employer over the work, the amount of skill required to perform the work, and the degree of permanence of the working relationship. An independent contractor is free from the control and direction of the hirer, is sufficiently skilled to work autonomously, and is providing services that are temporary or intermittent.
- The second core factor relates to whether the work being performed is integrated with or separate from the overall business. An independent contractor performs work that is outside the usual course of the hiring entity’s business, either a specialized skill or temporary need for additional resources.
Worker classification issues have gotten bigger with the explosion in the gig economy. Determining whether a worker is considered an independent contractor or an employee can be complicated, which is why DOL issued clarifying rules. The decision about worker classification assigns the responsibility and cost to the employer or the worker, so it’s important to get it right.
Need more information? The IRS has more details about worker classification at https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee.