The US Department of Labor (DOL) has issued new guidance that redefines independent contractors (often called 1099 workers after the IRS form.) This is critical to your business if you use independent contractors since many now will be considered employees instead.

Under the new guidelines issued July 15, 2015 for classifying such workers, the DOL looks closely at what the ‘economic realities’ are to decide whether a worker is economically dependent on the employer or are actually in business themselves.

There are six factors which the DOL typically will assess in total, and none are considered alone. These include:

• The extent to which the work performed is an integral part of the employer’s business
• The worker’s opportunity to manage for his/her profit and loss (not including ability to work more hours)
• The relative investments of the employer and the worker
• Whether special skills (business skills, not technical), judgement, and initiative are required to perform the work
• Permanency of the relationship
• Degree of control retained or exercised by the employer, not including flexible work options

What does this mean for your business?

Just because a person wants to be considered an independent contractor does not mean you should allow it.  While many businesses prefer to use independent contractors to save on payroll taxes and benefits, neither the DOL or IRS have approved  that practice, as both large and small firms have learned in past cases.

Independent contractors should be used carefully and not commonly.  Now you need to keep detailed documentation on each independent contractor to show how you determined the person was not an employee.  Such documentation could include:

• The work requirements used to seek independent contractors’ bids include:
• Project work plans which show the limits of the work
• Business cards, W-9s, business website links, and copies of business licenses
• A list of other current clients of each independent contractor or such pages on their website
• Correspondence related to the work

In addition, various legal newsletters have recommended the following practices to help support your determination that the person is an independent contractor and not an employee:

• Do not provide internal email addresses
• Do not normally invite them to employee functions
• Do not provide any employee benefits

This new guidance means it would be wise to look at all independent contractors you are currently working with and assess whether each is actually independent or should be considered an employee.  Doing this review now will help you avoid legal risk, including pay, benefits, compliance, and tax problems.  For further information, talk with your employment attorney or contact us for a legal or HR consult appointment.

For more information, please reverence this guidance from the Department of Labor.