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Independent Contractor vs Employee

When looking to hire, companies may think they know what an Independent Contractor is and that they would rather hire one vs an employee.  However, the Department of Labor recently issued new rules in determining who qualifies as an independent contractor as opposed to an employee, so it’s important to make sure you have it right.


The new rule, effective 3/11/2024, utilizes much of the same components as the old, however, in the past, some factors seemed to carry more weight than others and now the factors are considered equally important.  Some employers think anyone can qualify as long as they both agree to it, but that’s not the case.


As with any new rulings, there are likely to be questions and challenges that may play out in the courts.  But in the meantime, what should employers consider when looking to hire either a contractor or an employee?  The test for an Independent Contractor considers the following:

1.       Opportunity for profit or loss depending on managerial skill

2.       Investments by the worker and the potential employer (who’s supplies/equipment are used?)

3.       Degree of permanence of the work relationship (is there any type of end date?)

4.       Nature and degree of control (does the employer control/direct all/most of the work?)

5.       Extent to which work performed is an integral part of the employer’s business

6.       Skill and initiative


Be aware, the IRS and NLRA may have different guidance on independent contractors, so this is not the only consideration.    In addition, some states have their own guidance.


What happens if you misclassify someone as an independent contractor who should be an employee?  Well, there can be legal and tax issues involved, leading to potential penalties and legal fees.


Having a contract with an independent contractor is a good idea, but it doesn’t absolve anyone from misclassification issues.  Don’t treat contractors as employees (i.e., don’t provide employee handbooks or onboard them like employees, don’t pay them from payroll, don’t enroll them in benefit plans or issue business cards, don’t require set hours, etc.). 


Independent contractors are not employees and shouldn’t be used as substitutes.  See the DOL Wage and Hour Division for additional information at

 



Two business women having a conversation
Independent Contractor or Employee?


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