It can sometimes be difficult to apply 20th century standards to a 21st century workforce. But that’s what the U.S. Department of Labor (DOL) and other agencies still do. Many of these laws were enacted during a time when remote work didn’t exist. Neither did independent contractors (ICs) working with many different clients on websites like Upwork. As you can imagine, these 20th century laws can be a challenge to navigate. Here’s how current and future policies may impact how you engage contingent workers.
Regulators are still hot on classification
Worker classification continues to be a priority for many government agencies. It doesn’t look like regulators will ease up anytime soon.
A large part of employee payroll taxes feed state departments of revenue and other agency coffers. There are also a number of examples of how government agencies assert their policy agendas through an employee relationship. For example, agencies direct employers on how to pay wages, what benefits to provide, and so on. If they deem you made a classification error, fines and penalties can add up quickly. All the more reason for you to get classification right before the talent begins work.
U.S. policy expectations for engaging contingent workers
Early signs indicate this administration takes a more business-friendly position towards utilizing independent contractors. But don’t get too excited yet, because developments are still ongoing.
Upon taking office, the new U.S. Secretary of Labor, Alexander Acosta, quickly withdrew the DOL’s previous informal guidance on IC classification and joint employment. Although the question remains whether new federal guidance is forthcoming, the withdrawal was seen by many as a good sign for business. Otherwise, there’s not much other activity—partly because several key DOL posts remain unfilled.
Congress also introduced two bills that are well received by the business community. The Save Local Business Act (H.R. 3441) was passed by the House in November 2017 and is pending Senate action. The bill seeks to limit the definition of a joint employer under federal laws. In the meantime, the business community may feel lifted by the NLRB overruling of Browning-Ferris in December 2017. The Board’s decision reinstated its prior joint employment standard.
A second bill, The Harmonization of Coverage Act (H.R. 3825), was introduced in September 2017. This bill is a similar attempt to simplify IC classification by harmonizing the Fair Labor Standards Act (FLSA) definition of an employee with the common law rules used for federal tax purposes.
Although it’s too early to tell how far the bills will go, some are hopeful. The bills show Congress is attempting to give businesses more opportunity to work in an agile way.
Tests and laws about engaging independent contractors still differ by state. In some cases, cities may add their own regulations too.
Some states are picking up a trend that Arizona embraced with a new IC law passed in 2016 (A.R.S. § 23-1601). The idea is to provide a kind of up-front protection that your classification is right. Under the Arizona law, a presumption of an independent contractor relationship is created when a contractor executes a “declaration of independent business status.” States like Colorado, Nevada and South Dakota have laws with similar effect.
4 tips for stronger IC classification
Classification in the U.S. still remains a balancing act of tests. There are still many different tests for various federal and state laws. Adding to the complexity, each test looks at different factors.
The good news is, many tests have a few factors in common. Jacqueline Kalk, a shareholder at Littler Mendelson, suggests the closer you follow these four tips, the better you can defend your IC classification. These four tips apply no matter where the talent works worldwide.
- Think project-based: Don’t bring people in as independent contractors for an ongoing business need. Think about a short or defined term project that lends itself to contracting.
- Give up control: Never direct when, where, or how the work gets down. It’s okay to state what the result should look like (e.g., design a mobile-friendly website). It’s also okay to establish a deadline that both you and the contractor agree upon.
- Keep them off-site: Have the work done remotely. Typically, ICs should not work in any of your office locations.
- Engage for specialized skills: ICs often provide skills that aren’t available within your organization. The higher the skill level, the more likely a worker qualifies as an IC.
Do the work upfront
When you’re setting up an independent contractor engagement, do the compliance work upfront. Then you won’t have to worry about it after that. If you’re engaging a lot of contractors or have longer-term projects, get help.
“The key is to partner with someone who is doing it right,” says Kalk. “Partner with someone like the Upwork Compliance Solution who handles everything and will indemnify you. Then there’s not a whole lot of risk of joint employment or misclassification.”
Remember that in regards to classification, you can’t get too detailed. “If you use a compliance service, make sure it doesn’t take a once and done approach. The service should classify for every project. Make sure it can do so for every location where you may engage talent,” suggests Kim Owens, senior employment counsel at Upwork.
The information in this article includes highlights from an Upwork webinar featuring Kim Owens and Jacqueline Kalk. To hear more insights from Owens and Kalk, watch the full webinar.
DISCLAIMER: THIS ARTICLE PROVIDES GENERAL INFORMATION ONLY AND DOES NOT CONSTITUTE LEGAL OR TAX ADVICE. NO STATEMENT SHOULD BE CONSTRUED OR RELIED ON AS LEGAL OR TAX ADVICE. EVERY SITUATION VARIES, AND READERS SHOULD SEEK ADVICE ABOUT THEIR PARTICULAR CIRCUMSTANCES FROM THEIR OWN ADVISORS.
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Author: Brenda Do