The seemingly never-ending debate over how workers should be classified – or label themselves – under federal labor and tax laws is heating up again.
A controversial new regulation from the U.S. Department of Labor (DOL) outlines its new approach to the issue.
Employees and independent contractors have long been treated differently. Independent contractors are usually exempt from labor and unemployment rules and regulations, as well as some payroll issues. Employees, of course, are covered by these regulations.
Those in the aggregate industry obviously appreciate the absence of payroll taxes and the withholding burden associated with employees that’s nonexistent with independent contractors. Many individuals favor the flexibility, freedom and perceived tax benefits as independent contractors.
Now, though, DOL has a new rule under the Fair Labor Standard Act (FLSA). According to the DOL, the new rule preserves workers’ rights and offers consistency across all businesses covered by the FLSA.
Critics of the new DOL rule claim it threatens the livelihoods of many entrepreneurs by reimplementing a confusing method for determining whether a worker is an independent contractor or an employee. From an employer’s perspective, the new independent contractor rule will help workers recover lost wages that resulted from misclassification.
The failure of a crushed stone or sand and gravel operation to properly classify independent contractors and document their status at the beginning of a relationship can lead to liability for workers’ compensation and unemployment taxes, benefits, lawsuits, and wage and hour claims down the road.
The new definition
Ordinarily, determining whether a worker is an independent contractor or an employee is determined by examining the relationship between the worker and the employer.
All evidence of control and independence is considered in determining an individual’s status, including behavioral control, financial control and the parties’ categorization of the relationship itself. This is seemingly an easy determination, but the DOL has gone further.
The DOL and the courts have long applied a so-called “economic reality test” to determine whether a worker is an employee or an independent contractor. In recent years, the DOL usually focused on two “core” factors: the nature and degree of control over the worker, and the worker’s opportunity for profit or loss.
After much legal wrangling, the DOL recently issued the “Employee or Independent Contractor Classification Under the Fair Labor Standards Act,” shifting back to its pre-2021 rules where a number of different factors are applied. The new rules remove the old two “core” factor test in favor of one that relies on a multi-factor examination to determine if an employer-employee relationship exists.
The new rules reclassify workers who are “economically dependent” on a company so they are considered employees instead of contractors. Unlike the earlier DOL rule that considered economic factors such as scheduling supervision, price-setting and the ability to work for other employers, the new rule would entitle workers to more benefits and legal protection. The new rules seemingly ignore whether the work performed is integral to the employer’s business.
Paying the piper – retroactively
The cost to any small crushed stone or sand and gravel producer mislabeling workers as independent contractors will be substantial.
According to the DOL, misclassification is “a serious issue that denies workers’ rights and protections under federal labor standards, promotes wage theft, allows some employers to gain an unfair advantage over law-abiding businesses and hurts the economy at large.”
Employers must pay FICA, Medicare, state, local, unemployment and workers’ compensation expenses for an employee. Depending on the number of hours worked, an aggregate producer might need to include the employee in health, retirement and other benefit plans – not just going forward, but potentially to catch up on prior benefits that should have been incurred.
Under the FLSA, employees are entitled to minimum wage, overtime pay and other benefits. Independent contractors are not entitled to such benefits, but they generally have more flexibility and set their own schedules and work for multiple entities.
