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Proposed Federal Rule May Affect Worker Classification for Employers

 Posted on October 31, 2022 in Small Business Taxes

b2ap3_thumbnail_shutterstock_387070813.jpgThe classification of workers as employees or independent contractors is an important legal distinction that can have significant implications for employers. Employees are entitled to a number of rights and protections under the law, including minimum wage and overtime pay, while independent contractors are not. It is important for employers to ensure that workers are classified correctly, and they may face penalties if they fail to do so. Recently, the Department of Labor announced a proposed rule that may affect worker classification. Employers will need to understand how this rule could affect them and how they can avoid the potential risks of misclassifying workers.

Potential Changes to Federal Worker Classification Rules

The Department of Labor follows certain rules when determining worker status under the Fair Labor Standards Act (FLSA). During the administration of President Donald Trump, these rules were updated to focus on two "core factors": the degree of control that an employer and/or worker has regarding key aspects of the work being performed, and a person's opportunities for profits and losses when performing work. This rule was generally considered to favor employers, allowing them to classify more workers as independent contractors.

The administration of President Joe Biden is seeking to put new rules in place that will protect the rights of workers. The proposed new rule would look at the "totality of the circumstances" that may affect a worker, and it would include six factors to consider:

  • A worker's opportunities to earn profits or incur losses based on their ability to exercise initiative and manage the level of investment in the work being performed.

  • The investments made by both the employer and the worker. While tools or equipment purchased by a worker to perform a specific job may not be considered an investment, other investments that would support an independent business may be considered.

  • The permanency of the relationship between the worker and the employer. A continuous or indefinite relationship may indicate that a person is an employee, while a short-term, sporadic, or project-based relationship may indicate that a person is an independent contractor.

  • The amount of control the employer has over the work being performed, including whether an employer chooses projects, sets schedules, controls the amount of work being performed, and assigns work that may affect a person's ability to perform work for other employers.

  • Whether the work being performed is important or central to the employer's business.

  • Whether a worker has specialized skills and follows initiatives that show that they are in business for themselves rather than being economically dependent on an employer.

Federal Rules Compared to California's "ABC Test"

While changes to the rules may place stricter requirements on employers, California businesses already are subject to strict rules that determine how workers are classified. The state uses an "ABC test" to determine how a worker is classified, and all of the following factors must be true for a person to be considered an independent contractor:

  • The worker must be free from direct control by an employer over the work being performed.

  • The worker must perform work that is outside the employer's regular course of business.

  • The worker must have an independent business or trade in which they perform work of the same nature as that being performed for an employer.

The Dangers of Worker Misclassification

Employers who improperly classify workers as independent contractors rather than employees may face multiple types of penalties. Failure to withhold income taxes and FICA taxes from a worker's wages may result in IRS penalties, and an employer may be required to pay a percentage of the wages that were paid and a percentage of the FICA taxes that were not withheld. In addition, under the California Labor Code, employers who have willfully misclassified workers may be subject to civil penalties of $5,000 to $25,000 for each violation.

Contact Our San Jose Employment Lawyer

Determining how to classify workers correctly can be a complex task, but it is crucial for businesses to get it right. Failing to do so can lead to costly fines and penalties, as well as damage to a business's reputation. At John D. Teter Law Offices, our San Jose, CA worker classification lawyer can help address these issues and advise employers on how to minimize the monetary risks they may face. Contact us today at 408-866-1810 to discuss these and other issues in a consultation.


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