Department of Labor Proposes New Definitions of Employee, Contractor

Perhaps one of the biggest issues facing employers and employees alike is worker misclassification. Classifying a worker as an employee or independent contractor has many ramifications including differences in tax withholdings, benefits administration, and legal protections. These issues are becoming more commonplace for two main reasons. First, the gig economy has exploded in the last decade. Companies like Uber, Lyft, Instacart, and others have millions of combined workers and have been involved in a legal battle over the classification of their workers for years now. Secondly, the Coronavirus pandemic has caused massive changes in the workforce. Many have been laid off and forced to find other work, including second jobs like food delivery. 

In response, the Department of Labor has proposed a new rule to clarify the distinctions between employees and independent contractors. 

“The rule we proposed today continues our work to simplify the compliance landscape for businesses and to improve conditions for workers,” said Wage and Hour Division Administrator Cheryl Stanton. “The Department believes that streamlining and clarifying the test to identify independent contractors will reduce worker misclassification, reduce litigation, increase efficiency, and increase job satisfaction and flexibility.”

The new rule would use the “economic reality” test that determines whether the worker is in business for themselves or relies on the employer for work. In addition, the rule adds three additional factors that can be used to determine worker classification. These additional factors are the skill required to perform the work, how permanent the relationship between the employer and the worker is, and whether the work is part of an “integrated unit of production.”

The proposed rule was open for public comment, which closed on October 26th. If approved, this rule would replace the DOL’s previous interpretations of the definitions of an independent contractor. 

What This Means For California Workers

Worker classification is important for many reasons. Perhaps the biggest is the tax implications. Employees typically have their taxes taken out of their paycheck by their employer, while independent contractors are responsible for their own self-employment taxes. Each of these statuses has pros and cons, but they require different planning and tax filing strategies. 

In addition, whether or not a worker is entitled to benefits and certain legal protections rests on their classification. Some businesses may try to avoid giving certain benefits by misclassifying employees. There can be financial and legal penalties when businesses misclassify workers. The new rule would make it easier for employers to properly classify workers and for workers to more easily identify when they have been misclassified. 

If you believe that your employment status has been misclassified, you may need legal assistance from a California employment law attorney. Davtyan Law Firm helps all kinds of California workers protect their legal rights. Call us today at (818) 275-5799 for a free consultation!

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