The differences between independent contractors and employees have always been complex. Even with widely used IRS guidelines, many businesses improperly classify their employees as 1099 workers. Now, making this distinction just got more difficult. New Department of Labor rules have made it more likely that a worker will be an employee, not a contractor.
If your business uses independent contractors, our New York business law attorneys can advise you about these changes.
Independent Contractors vs Employees: The New Rules
Recent changes introduced by the U.S. Department of Labor are designed to be more beneficial to employees. These new guidelines examine the totality of the circumstances of the business’s relationship with the worker. Under this new system, there are still various elements that will be examined in determining a worker’s status. The following are some examples.
The Level of Control Exercised by the Employer Over Work
Employers generally have the right to control the work performed by their workers. But this is more indicative of an employment relationship, not a 1099 situation. Some specific factors that may be considered are:
- The hours that the employee can work
- The location where the work is to be done
- Control and ownership of the worker’s equipment and tools
- Processes that the worker must use
- Overall supervision of the worker
Financial Investment and Risk
Did the worker invest in the tools and equipment being used? By doing the work, is it likely or possible that the worker may experience a loss? If the answer to these questions is no, the worker is probably an employee. Where the worker makes no investments and relies on the company to earn money, he or she is likely an employee.
The Permanency of the Work Relationship
Independent contractor jobs are usually short-lived. These workers are there to perform a limited number of tasks for the company and then move on. Not so with employees. When an individual works consistently and indefinitely for one company, he or she is likely an employee. This is especially the case when there are no other sources of income.
By contrast, contractors tend to have many clients and short relationships with each one.
Pay and Pay Schedules
Contractors can more easily negotiate their pay rates and are compensated upon the completion of specific tasks. Employees, meanwhile, are paid a set salary or hourly rate and their work tasks are rolled into their pay. When a business controls the timing and rate of pay, an employer-employee relationship is evident.
Independent contractors are called “independent” precisely because of the autonomy they enjoy in areas like this.
Looking at the Entire Work Relationship
Under the new rules, all of the above factors could prove relevant to determining whether a worker is an employee. Other ones may also be looked at, depending on the circumstances. This may make it more difficult to determine a worker’s status because every relationship must be independently examined. But making this determination is important.
The new “totality of the circumstances” standard is intended to make more workers employees rather than contractors. This obligates the employer to withhold taxes, acquire workers’ compensation coverage, and provide other benefits. In short, this imposes more costs on the companies that hire employees.
You need the experience of a New York business lawyer to ensure your company knows the rules. Failure to comply could be costly. If your company misclassifies an employee as an independent contractor, it may face stiff penalties. Fines, lawsuits, and additional taxes may be the result.
Don’t Get Behind On the Law. We Can Help You Keep Up
Our job at Rosenbaum & Taylor is to help New York employers stay ahead of changes in the laws like this one. We provide comprehensive legal representation and counsel to businesses of all sizes. To learn more about our services, give our office a call today.
