Be Prepared: New 1099 vs. W2 Rule Now In Effect

A little over a month ago, we informed you about the new rules when it comes to contractors vs. employees. As of Monday, March 11th, the new rules are in effect and you need to act now now.

We are not into scare tactics, but here are a few reasons why you should care:

1. Costly litigation resulting from misclassification.

2. Significant fines for non-compliance with labor standards.

3. Back payment of wages, including overtime, for misclassified employees.

With that said, here is all you need to know:

An important update from the U.S. Department of Labor might affect how you classify your workers. On January 10, 2024, the DOL gave a final rule called "Employee or Independent Contractor Classification Under the Fair Labor Standards Act", which aims to provide clearer guidance on determining whether someone is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). Small businesses need to be very careful and take a long look at their classifications because the penalties can be costly.

The Department believes that this new rule, which takes effect on March 11, 2024, will help reduce the risk of misclassifying employees as independent contractors. We know that it all is a bit confusing so we brought in Karen Moss, SPHR, SHRM-SCP to talk us through the update. If you want a more in-depth breakdown, we did record a podcast where we talk everything through.

In assessing whether a worker qualifies as an employee or independent contractor, the final rule outlines six factors that businesses and workers should take into account when evaluating if they are a 1099 or W2. Here are those factors:

Factor #1: Opportunity for profit or loss depending on managerial skill

This is a big one and a little confusing, but it boils down to these variables:

• Whether the worker determines or can meaningfully negotiate the charge or pay for the work provided;

• Whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed;

• Whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and

• Whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space.

Example: Let's look at worker in a landscaping company. If the worker is being paid for his services and the rate is being determined by the company, that worker cannot be an Independent Contractor. If they are finding the business on their own and independent of a company that has any control over them, they can be deemed an independent contractor.

Factor #2: Investments by the worker and the potential employer

This one is a little more simple and clear. Are you paying for the worker's tools or supplies that the worker uses?

And Independent Contractor has their own tools necessary to complete their work. An employee uses resources, tools, and supplies that are given by the employer. That one should be pretty clear.

What to not do: Although this is easy to fix, do not tell all of your remote workers to buy their own computers because this is just one factor.

Factor #3: Degree of permanence of the work relationship

Is this someone who is working for you on a regular basis with? Is the work relationship you have continuous, the same role, and exclusive? If that is the case, then they need to be an employee.

Example: If you have someone who is doing bookkeeping for you that is part-time and indefinite, that person should be an employee.

Factor #4: Nature and degree of control

Are you setting the worker's schedule? Are you supervising the performance of the work? Are you incentivizing or disciplining based on work?

This one makes a lot of sense, but control is huge when making the classification of a employee vs. and independent contractor.

Factor #5: Extent to which the work performed is an integral part of the potential employer’s business

This one can be a little tricky. What really is critical or necessary to the business? Is the worker critical to your daily ins and outs of your business?

The best way to describe this one is to use the example of an accountant. If your accountant does your accounting and payroll, that worker is critical and should be an employee. However if the accountant is just doing the taxes twice a year, this could be a contractor.

Factor #6: Skill and initiative

Does the worker use specialized skills to perform the work and do those skills contribute to business-like initiative?

If the specialized skills match up to what the business is doing as whole, this could be labeled as an employee.

Our Overall Takeaways for 1099 vs W2

We believe the government is definitely trying to limit the scope of contractors. Small businesses need to be very careful of how they are classifying their employees. You need to have a plan. The penalties can be very costly!

How We Can Help at Innovative Outsourcing with Classifications

Our HR Audit: If this article made you nervous, you most likely need an HR Audit. Starting at $2,500, we do a full examination of your HR practices including your classifications (compliance, retention, talent, compensation, etc.) Link to that is below or you can message me or email me at cfiler@innovative-outsourcing.com to get started:

Additional Information on 1099 vs. W2

1.Article from the government that was our main source:

https://www.dol.gov/agencies/whd/government-contracts/small-entity-compliance-guide

2. Podcast - More examples and more in-depth analysis: