Industry News

The Independent Contractor NPRM: What It Means for Your Business

You may have heard that back in October, the Department of Labor released a notice of proposed rulemaking (NPRM) that would change the way workers can be classified as independent contractors under the Fair Labor Standards Act. The NPRM comment period ends on Dec. 13, and it’s only a matter of time before we find out if the proposed rule will be enacted.

If passed, the new rule will significantly impact how companies can utilize 1099 employees. Below are some of the key points employers should know so you can be ready for whatever happens.

The 2021 IC Rule

The DOL’s new rule aims to replace the current rule passed in January 2021, which uses an “economic reality test” to determine whether a given employee can be classified as an independent contractor. This test focuses on two “core factors”: “The nature and degree of the worker’s control over the work; and the worker’s opportunity for profit or loss based on initiative, investment, or both.” These factors are meant to outweigh three “non-core factors”: “the amount of skill required for the work, the degree of permanence of the working relationship between the worker and the employer, and whether the work is part of an integrated unit of production.”

The new rule, on the other hand, will essentially level the playing field—weighing all factors equally to approximate a “totality of the circumstances.”

What is the Totality-of-the-Circumstances Test?

So what factors are accounted for under the new test? The NPRM lists six, each of which are detailed in the Federal Register:

  1. Opportunity for profit or loss depending on managerial skill
  2. Investments by the worker and the employer
  3. Degree of permanence of the work relationship
  4. Nature and degree of the worker’s control over the work
  5. Extent to which the work performed is an integral part of the employer’s business
  6. Skill and initiative required for the work

By weighing all six of these factors equally, the DOL hopes to “reduce the risk that employees are misclassified as independent contractors, while providing added certainty for businesses that engage (or wish to engage) with individuals who are in business for themselves.” In practice, however, the new rule could create real challenges for employers who rely heavily on independent contractors. Investors seem to think so, at least: After the DOL announced the NPRM, share prices for gig-economy services like Uber and Lyft fell hundreds of points.

In our fast-paced economy, where regulators often find themselves racing to keep up with evolving technologies, it’s more important than ever to keep an eye on compliance issues. Whether you’re already working with 1099 employees or just considering your options, partnering with a professional employer organization like INVO PEO can take care of the compliance work for you. Reach out today to learn how we can keep you from drowning in paperwork, so you can focus on your business.

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