Scrapped DOL Rule? What to Tell Your Clients

If you’ve been keeping up on all-things Department of Labor (DOL), you probably know about the new independent contractor rule that almost saw the light of day. Almost. But then, it was scrapped.

For employers, like your clients, it’s been a confusing past few months. Consider touching base with your clients so they’re up to speed on the latest news on independent contractor classification. 

What to tell your clients about the scrapped DOL rule

Not sure what to say? Here’s a rundown of what you can tell your clients about the scrapped DOL rule. 

Keep in mind that some of your clients may know about it. Others might not have even heard about it. And, you may have clients who think the rule went into effect. 

Make sure your clients are all on the same page—the legal page—by going over the following.

1. The difference between independent contractor vs. employee

Employers are responsible for classifying workers as either independent contractors or employees. This is a key step in compliance that determines an employer’s payroll and payroll tax responsibilities.  

Employees are workers an employer hires within their business. Businesses add employees to their payroll and withhold taxes and other deductions (e.g., contributions) from their wages. 

Independent contractors are those who perform work for other businesses but have their own business. Unlike employees, employers do not add independent contractors to their payroll. Instead, they pay contractors for their services. Contractors handle their own taxes and benefits (e.g., health insurance). 

To help employers correctly classify workers as either contractors or employees, the IRS has a three-part test, and the DOL has its own list of factors, known as the economic reality test. States may also set their own contractor vs. employee tests. 

So, what’s the big deal about classification? Worker misclassification can lead to severe employer penalties (we’re talking penalties, interest, and back pay) because of the impact on the misclassified worker. Workers who are misclassified as contractors when they should be employees aren’t covered under the Fair Labor Standards Act, don’t have access to benefits or unemployment insurance, and are responsible for self-employment tax.

2. What the rule was going to be

Under the Trump Administration, the DOL released the “Independent Contractor Status Under the Fair Labor Standards Act” new rule on January 6, 2021.

As mentioned, the DOL has an economic reality test that employers can refer to when classifying workers. However, this new rule aimed to clarify which DOL factors were most important when classifying a worker.

The scrapped Independent Contractor Status Under the Fair Labor Standards Act reaffirmed the use of the current economic reality test.

It also pulled out “two core factors,” making them the most important in classification:

• Nature and degree of control over the work
• Worker’s opportunity for profit or loss based on initiative and/or investment

Employers who couldn’t come to a conclusion after looking at these two core factors could then move on to the additional factors in the economic reality test:

• Skill required
• Working relationship’s degree of permanence
• Whether the work is part of an integrated unit of production 

The rule was lined up to go into effect on March 8, 2021. But, it never officially went into effect. The Biden Administration’s DOL froze pending changes on January 20, 2021...

3. The death of the DOL rule proposal and what happens next

That temporary freeze soon became a permanent dismissal.

On May 5, 2021, the Department of Labor withdrew the contractor rule proposal. Why? The DOL stated that the proposal was:

• Inconsistent with the FLSA’s purpose
• Confusing on businesses and workers
• Potentially disruptive

Making sure your clients know the rule is no longer on the table is a key part of the correct contractor vs. employee classification.

However, your clients may wonder what that means for the future of worker classification. Will employers continue using the current IRS and DOL factors to determine worker classification? Or, will the Department of Labor release a new rule?

Right now, things are a little up in the air. The president has stated he supports making the ABC Test (a state classification test in California) the new federal model for “labor, employment, and tax laws.” But, there currently is no proposal for it.

If your client has questions about the ABC Test, here’s a brief summary. Employers must classify workers as employees unless the worker:

• Is free from the control and direction of the hirer in relation to the performance of the work, both under the contract and in fact
• Performs work that is outside the usual course of the hirer’s business; AND
• Is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hirer

Although there’s nothing set in stone, you can encourage your clients to stay up-to-date with the news. And, you can let them know if the DOL releases a new proposal or finalizes a new rule.

Talking with your clients about the DOL rule: Checklist

Your clients have a number of things on their mind when it comes to running their business. They might not be able to stay updated with every proposal released and withdrawn.

 Make sure your clients:

• Know the DOL withdrew the final contractor rule
• Understand how to classify workers under the current economic reality test and IRS three-prong test
• Pay attention to any state laws on contractor vs. employee classification they may need to follow
• Stay up-to-date with any future changes that could take place
• Recognize the importance of worker classification