Updated: White House, DOL on Independent Contractors in Labor Policy
With inflation soaring and cost of living on the rise across the nation, the White House is taking steps to support parts of the labor market that might be disproportionately affected by these economic changes. One of these steps involves how companies classify and treat independent contractors, whose work is becoming increasingly crucial in the gig economy.
How does this attention to contractors affect HR? Read on to find out.
Note: This article was updated on October 21, 2022, to reflect new information from the DOL on classifying workers. See below for details.
The White House and Labor Market Practices
According to HR Dive, one of President Biden’s priorities is to crack down on organizations using “anti-competitive tactics” to keep wages low and avoid paying for employee benefits. To that end, the Federal Trade Commission (FTC) and the National Labor Relations Board (NLRB) recently established what’s called a memorandum of understanding—a document that expresses a shared goal and lays out actions each will take—asserting their support of programs that protect workers and promote competition in the marketplace.
This resolution comes in the wake of the Department of Justice’s recent attempts to prevent two book publishers from merging, since the merger would result in the new organization controlling over half the market. This type of action is designed particularly to protect independent contractors who, in this case, depended on competition between the two companies in order to negotiate rates for their writing.
HR’s Role in Enforcing Fair Labor Practices
In a global market, competition is important to prevent monopolies, but the actions of the DOJ and the White House mostly apply to larger companies, whose acquisitions of other organizations could make them big enough to control their markets. So why should HR departments at small to midsize organizations care?
First, measures that discourage anti-competition tactics are good for small businesses, as too many mergers might make it hard for a smaller company to compete.
More directly, though, the FTC and NLRB’s memorandum reminds American businesses that it’s important to treat independent contractors fairly—not just for the workers’ sakes, but also to keep your organization compliant.
How to Stay Compliant When Working with Independent Contractors
The most important step HR can take to stay compliant with relevant labor laws is to classify workers correctly. That means accurately distinguishing between part-time and full-time employees and between exempt and non-exempt employees. But you also need to classify some workers not as employees at all, but as independent contractors.
The IRS defines an independent contractor as an individual for whom “the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”
Independent contractors are not considered employees because they work only when required. As a result, contractors don’t require the same expenses that go into hiring, onboarding, and retaining a full-time teammate—which makes them especially attractive in a tight economy.
But remember, a worker is only an independent contractor if the employer has no legal right to control how the work is performed and if no employer-employee relationship exists. Misclassifying an employee as an independent contractor, or treating a contractor as an employee, is a fast lane to steep non-compliance penalties and even lawsuits.
If you work with independent contractors, you’re well served to classify them carefully, as well as make sure you’re supplying and filing the right documentation for them when tax season arrives, since contractors use form 1099 rather than form W-2.
Even if the White House’s work to block mergers of large companies doesn’t apply to you, the goal of protecting independent contractors should serve as a reminder to check that everyone on your payroll is classified and compensated correctly. If there’s any doubt, we recommend conducting a payroll audit so you can stay accurate, on time, and compliant.
Update: DOL Proposes New Rule for Classifying Contractors
The classification guidelines discussed above may be changing. In October 2022, the Department of Labor proposed a new test for independent contractors based on the "totality of the circumstances." According to the DOL, this test would be designed to prevent organizations from incorrectly classifying an employee as an independent contractor, thus denying them the protections of minimum wage and overtime pay.
Under the new proposed rule, classification will depend on a multi-factor framework that will make it slightly more difficult to classify a worker as an independent contractor, so as always, we recommend your organization classify with care.
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