Independent Contractor vs. Employee: The DOL Changes The Game
The DOL advises that an independent contractor is a worker who, as a matter of economic reality, is in business for themselves. They are....
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FEBRUARY 2024
TABLE OF CONTENTS
TABLE OF CONTENTS
TABLE OF CONTENTS
TABLE OF CONTENTS
TABLE OF CONTENTS
SHARE & PERFORM
Last month, we delved into the powerful capabilities of "Perform," isolved's performance management module. This month, we're thrilled to introduce you to the other half of this dynamic duo: "Share" – a groundbreaking module dedicated to elevating employee engagement and strengthening our workplace community.
What is "Share"?
"Share" is the engagement management component of isolved, designed to enhance employee engagement, boost morale, and foster a positive workplace culture. It complements "Perform" by focusing on the human side of our work environment, recognizing the crucial role that employee satisfaction and well-being play in the success of our organization.
Key Features of "Share":
Rewards and Recognition
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"Share" emphasizes the importance of acknowledging the hard work and achievements of our team members.
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It provides a platform for managers and peers to celebrate milestones, deliver positive feedback, and reinforce the value of each employee’s contributions.
Engagement and Interaction
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With interactive features like feed walls and surveys, "Share" keeps everyone connected and informed.
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It promotes a culture of openness and collaboration, encouraging team members to share ideas, feedback, and participate in company-wide discussions.
Multi-Lingual Learning Resources
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Recognizing the diversity of our workforce, "Share" offers courses and materials in multiple languages, catering to the unique needs of our team members.
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This approach ensures inclusivity and accessibility in our learning and development initiatives.
Employee Rewards Store
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An exciting addition to "Share" is the Employee Rewards Store, where team members can redeem points earned through engagement activities for a variety of rewards.
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This feature not only motivates but also provides a tangible way to show appreciation for our employees’ dedication and hard work.
For a good overview check out the 7-minute video "Communicate & Collaborate using Share & Perform" that provides a comprehensive overview of both "Share" and "Perform." This engaging and informative video will:
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Highlight how these modules integrate to enhance communication and collaboration.
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Offer insights into their features and benefits.
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Present practical applications and tips for effective implementation.
Why "Share" Matters?
In the post-pandemic world, understanding and engaging with employees beyond their professional roles has become more critical than ever. "Share" offers a comprehensive solution to this challenge, fostering a work environment where each individual feels valued, understood, and integral to our collective success.
isolved Feature of the Month: Share
IMPORTANT: New Independent Contractor Rules
Who Wants To Be An Independent Contractor:
The DOL Changes The Game
By: Sean Hansen, SHRM-CP
HR Compliance Coordinator
One of the toughest parts of hiring a new worker can be classifying their workers correctly. We’ve previously discussed the challenges of determining whether or not an employee is exempt from overtime, but there’s another question that comes first: Are they an employee or can they be classified as an independent contractor?
Depending on the business and industry, the answer isn’t always clear. To make it even more confusing, there have been multiple versions of Department of Labor (DOL) independent contractor tests over the years, with the most recent rule published in 2021. Some felt the previous rule was unclear in some circumstances, and certain factors were given too much weight in the final determination. To rectify this, the DOL has published a new final ruling, which replaces the previous ruling effective March 11th, 2024.
So what is an independent contractor anyways?
Before we jump in the deep end of the proverbial pool, what exactly is meant when we say ‘employee’ and ‘independent contractor’? Thankfully, this new ruling keeps the same basic definition as the previous one, so we don’t have to juggle multiple definitions.
The DOL advises that an independent contractor is a worker who, as a matter of economic reality, is in business for themselves. They are not economically dependent on an employer for work, because they are their own employer aka self-employed.
On the other hand, FLSA-covered employees are economically dependent on their employer for work. They also enjoy the protections of the FLSA, such as minimum wage, overtime rules, and other provisions. However, what ‘economically dependent’ looks like can be difficult to determine, which is why the DOL has published their final ruling.
But what exactly has changed?
While the new ruling is our main focus, it’s important to touch on what is changing, or perhaps more importantly, what is not changing. As discussed above, the definition of both ‘independent contractor’ and ‘employee’ will not change. Similarly, the question of economic dependence is the ultimate inquiry trying to be solved; both rulings provide a list of factors in order to determine whether or not a worker is economically dependent. In a broad view, the main purpose of the two rulings are the same, it’s the details of how to make the determination that has changed.
Previously, determining classification was based on five (5) factors. While we won’t go into detail on these since it has since been changed,
the previous factors were as follows:
1
The nature and degree of the individual’s control over their work
2
The opportunity for profit or loss
3
The skill required
4
The permanence of the working relationship
5
Whether the work is part of an integrated unit of production
The first two (2) factors were considered ‘core factors’ and given a greater weight when determining a worker’s classification. Under the new ruling, there are six (6) factors to consider, and they must be considered in the ‘totality of the circumstances’. This simply means that no factor has a greater weight than the other; they must all be considered when making a determination.
The six (6) new factors are as follows:
1
The opportunity for profit or loss depending on managerial skill
2
The investments by the worker and the potential employer
3
The degree of permanence of the work relationship
4
The nature and degree of control
5
The extent to which the work performed is an integral part of the potential employer’s business
6
Skill and Initiative
What exactly do these factors mean? Let’s look at each one more in-depth. While none of these factors alone determine classification, each of them helps point to the answer.
1.
The Opportunity for Profit or Loss
YES
indicates the worker may be an independent contractor.
NO
indicates the worker may be an FLSA-covered employee.
This factor refers to whether the worker’s own initiative or business acumen affects their economic success or failure. Can the worker determine or negotiate the pay for the work provided, or determine what jobs they take, and what priority the jobs are completed? Does the worker have the ability to hire others to facilitate completion of the work and/or do they rent an office space or purchase materials and equipment? If so, that might indicate they are not economically dependent on an employer. Independent contractors are able to accept or decline jobs as they decide, and their economic success is directly tied to their own initiative and ability to run their business; they can also hire their own workers to get the job done. If the worker has no opportunity for profit or loss, then that would suggest they may be an FLSA-covered employee.
Does the worker have an opportunity for profit or loss, based on their own managerial skill?
2.
Investments by the Worker and the Potential Employer
This factor seeks to determine whether or not any investments made by the worker are ‘capital or entrepreneurial’ in nature. For example, if a worker spends money on the cost of tools, worker’s labor, or costs that the potential employer imposes on them, those investments are determined by the job, and not towards supporting an independent business. The focus of this test is to determine if the worker is making similar investments to the potential employer, even if smaller in scale, as that would imply the worker is operating independently from the employer, indicating they would be an independent contractor. Does the worker purchase their own supplies and equipment to complete the job, or do they use supplies and equipment provided by the employer? If the latter, the worker may be best classified as an employee.
YES
indicates the worker may be an independent contractor.
NO
indicates the worker may be an FLSA-covered employee.
Does the worker have work investments that are considered capital or entrepreneurial?
3.
Degree of Permanence of the Work Relationship
Does the working relationship have a degree of permanence, or is otherwise indefinite or continuous?
This factor discusses how long the worker and the employer have their working relationship. For example, if that relationship is indefinite, continuous, or it requires exclusive work for the employer, that would indicate the worker would be an employee. Independent contractors, however, generally have a relationship that is a defined period of time, non-exclusive, or a project-based relationship.
YES
indicates the worker may be an FLSA-covered employee.
NO
indicates the worker may be an independent contractor.
4.
Nature and Degree of Control
Employers generally have a greater degree of control over employees than independent contractors. For example, if the potential employer is setting the worker’s schedule, supervises the performance of the work, or limits the worker from doing work for others, that would indicate the worker is an employee. This includes electronic surveillance; if the employer is monitoring the worker’s performance through technology, and reserves the right to discipline workers, that implies an employer-employee relationship.
Does the potential employer have an extensive degree of control over work performance and the economic aspects of the working relationship?
YES
indicates the worker may be an FLSA-covered employee.
NO
indicates the worker may be an independent contractor.
5.
Extent to Which the Work is an Integral Part of the Business
Employers generally have a greater degree of control over employees than independent contractors. For example, if the potential employer is setting the worker’s schedule, supervises the performance of the work, or limits the worker from doing work for others, that would indicate the worker is an employee. This includes electronic surveillance; if the employer is monitoring the worker’s performance through technology, and reserves the right to discipline workers, that implies an employer-employee relationship.
Does the worker perform work that is essential, critical, or otherwise integral to the potential employer’s principal business?
YES
indicates the worker may be an FLSA-covered employee.
NO
indicates the worker may be an independent contractor.
6.
Skill & Initiative
This factor discusses whether or not the work utilizes specialized skills, and whether those skills contribute to a ‘business-like initiative’. Employees may not use specialized skills in performing work, or otherwise be dependent on training given by the potential employer. However, both employees and independent contractors are capable of being skilled workers. This factor is more useful for determining whether the worker is an employee, while it cannot determine by itself if the worker is an independent contractor. It may also be beneficial to look at whether or not the worker already possesses the skills needed to perform the job or if they require training to be able to perform the job; if the worker requires training that the employer pays for and/or provides, they are likely an FLSA-covered employee.
Does the worker use specialized skills to perform the necessary work?
YES
indicates the worker could be either an FLSA-covered employee or an independent contractor.
NO
indicates the worker may be an FLSA-covered employee.
But what exactly has changed?
As stated previously, these factors are meant to be considered together. No one factor has more weight than the other. Instead, potential employers should weigh all the factors to assess if the worker is economically dependent.
This new ruling is meant to consider all factors that determine if the worker is an independent contractor, rather than putting more weight on certain factors, as was the case in the previous ruling. Employers will need to consider these new factors when determining classification for their current workers.
These changes are not yet in effect, but they will be as of March 11th, 2024.
The DOL has published some great resources to help employers out:
Additional Factors:
While the ruling does not list out specific additional factors, it does allow for additional factors being considered. Those factors need to some way indicate if the worker is economically dependent on a potential employer or not.
Additional Considerations:
Employers must also be aware that the Department of Labor Independent Contractor test is not the only test that must be considered when determining employee or independent contractor classification.
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The National Labor Relations Act (NLRA) includes its own definition of employees and independent contractors, which was recently updated in the Atlanta Opera Inc., 372 NLRB No. 95 (2023).
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The Internal Revenue Service (IRS) provides their own classification process, often referred to as the “common law test” which be found on their website: https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee.
Additionally, some states have their own version of the independent contractor test, which if criteria is more strict than the federal laws from other entities, would supersede and require employers to follow the more stringent testing requirements.
Employer Next Steps
As an employer, you might be wondering what your next steps are in preparation for the upcoming effective date of this new ruling.
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Be sure to review your employees and independent contractors, using the six (6) factor DOL test, to verify if their classification is correct.
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If the classification is no longer applicable, re-classify those workers accordingly, communicating in writing the reason for the re-classification, including what it means for their earnings, timekeeping responsibilities, and new worker rights as an employee, including paid leave, benefits, overtime, etc.
If you are a Vida HR client receiving HR services, reach out to your HR Business Partner for assistance.
HR ALERTS! by Vida HR Knowledge Center
HR Insights: Exempt Employee Pay Deductions
QUESTION:
My employer wanted to deduct money from my paycheck because I had to leave work a little early last Friday, meaning I didn’t quite get to 40 hours. However, I’m an exempt employee, so I get paid on a salary basis. Are they allowed to deduct that from my paycheck?
Readers of the newsletter might recall we have discussed exemptions from overtime previously. You can find the information HERE.
For a quick recap, an exempt employee under the Fair Labor Standards Act (FLSA) does not have to be paid overtime. It doesn’t matter how much they work, they get paid the same rate regardless. An exempt employee gets paid if they did work that workweek, regardless of how many hours they actually worked. 35 hours, 47 hours, it generally doesn’t matter about the actual time spent working.
However, that isn’t to say an exempt employee can simply not work for a day. If an employee is absent from work for one or more full days, as long as it is for personal reasons other than sickness or disability, and assuming they are not utilizing some sort of paid time off, an employer then is allowed to deduct from an employee’s paycheck. Deductions can also be made for a partial-week’s work, but only when it is that employee’s first or last week of employment.
For absences due to sickness or disability, a deduction is allowed if it’s made in accordance with a bona fide plan, policy, or practice of providing compensation for salary lost due to illness, such as a paid sick leave plan. Deductions can also be made when offsetting other compensation employees receive, such as jury, witness, or temporary military duty leave.
If an employee violates safety rules of major significance, an employer can impose penalties, as long as said penalties are made in good faith. Deductions are also allowed if an employee utilizes unpaid leave under the Family and Medical Leave Act (FMLA).
It may seem like what can and cannot be deducted is a seemingly endless list of rules and exceptions. As a general rule of thumb, partial day absences are not allowable deductions for exempt employees. If an employee misses two days, and part of a third, they can only be deducted for the two full days missed. In addition, absences due to the employer, such as being closed for inclement weather, do not allow employers to deduct that absence from the exempt employee.
All of this information is based on the Fair Labor Standards Act. For more information as well as more examples, the Department of Labor has published a great resource that can be found here.
Some states may have more requirements on what is and isn’t considered an allowable deduction, and it may apply to both exempt and non-exempt employees.
Employers may want to check with an employment lawyer for more information, or if they are a Vida HR client, consult their HR Business Partner.
Employee Highlight: Sanquenetta Russell
EMPLOYEE HIGHLIGHT
EMPLOYEE HIGHLIGHT
EMPLOYEE HIGHLIGHT
Hello, I'm Sanquenetta!
I was born and mostly raised in Memphis, TN. I am a 'military brat' and have lived in several places including Heidelberg, Germany. Living in Germany while I was in middle school was a once-in-a-lifetime opportunity with lifelong memories I reflect on quite often. My dad's last duty station was Fort Carson, CO and I've lived here my whole adult life. I am developing a love for the beautiful scenery Colorado Springs has to offer.
My HR career began as an HR assistant handling new hires and a laundry list of E-Verifies. I obtained my MBA in HR as well as took on a position as an HR Director before signing on with Vida HR as an HR Business Partner. I thrive on learning new skills and continue to push myself both academically and professionally. Currently, I am studying for my Certified Compensation Professional designation through World at Work.
In the Predictive Index, I'm categorized as an “Operator”- a title that encapsulates my consistency in processes and discipline to do the job right the first time. I am patient, hardworking, and dedicated to being an innovative member of any team I am a part of.
A little about me:
At home, life is spontaneous with my daughter Lizzie (7) and Cali (1). We share a love for travel, specifically to San Diego, reading, food, and anything Lizzie is interested in at the moment! I am excited to focus a little more on myself this year and take on some new and interesting hobbies outside of my beautiful daughters.
I have taken on a leadership position with the local National Association of Real Estate Brokers (NAREB), serving on their board as the Secretary. This nonprofit organization supports democracy and equal opportunity in housing which is a cause I am very passionate about. I also serve on the board of the African American Historical and Genealogical Museum of Colorado Springs as the Public Relations Coordinator. I am excited to serve my community and meet new and exciting people through service.
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