Manufacturers who hire independent contractors to support their business should be aware of new guidance on how to determine whether a worker is an independent contractor or an employee.
Earlier this month, the Department of Labor issued a final rule providing guidance on when to classify a worker as an independent contractor under the Fair Labor Standards Act (FLSA). The FLSA requires employers to pay non-exempt employees at least the Federal minimum wage for hours worked and overtime for hours in excess of 40 in one week and requires employers to maintain certain records on their employees. It does not mandate the same payment policies or recordkeeping for those who are considered independent contractors.
With the new rule, the Department of Labor has clarified some of the guidance used in classifying a worker as an employee or an independent contractor. First, the guidance reiterates the importance of the “economic reality” test, which determines whether the workers are economically dependent on the employer. This test has two key considerations:
- Does the employer have control over the work to be completed?
- Does the worker have the opportunity for profit or loss based on their initiative or skill and the investments they make in the work?
In addition, the rule addresses additional criteria, which should be used in conjunction with the economic reality test. Specifically, employers may be required to evaluate:
- the skills required to complete the work
- whether the relationship between the worker and employer could be deemed permanent
- whether the work is critical in the manufacture of a product
While the new rule is currently set to go in effect as of March 8, 2021, it is possible that the Biden Administration may prevent it from being implemented. As a result, manufacturers who work with independent contractors, including sales representatives, manufacturing representatives, or other support workers, may consider watching for developments closely and potentially reevaluating the status of their independent contractors. Further, if implemented, it is possible that other rules covering independent contractors, such as guidelines from the IRS indicating whether to withhold payroll taxes or send a Form 1099, may also be changed.
For questions regarding your independent contractors, contact a member of HBK Manufacturing Solutions at 330-758-8613 or firstname.lastname@example.org.