The #1 question I got from clients in 2022 is the #1 question I’ve gotten from clients so far in 2024:
“Should my 1099 contractors really be my W-2 employees?”
I love HR compliance because it’s generally black & white … but the guidelines for properly classifying your workers are as grey as storm clouds.
Still, the US Department of Labor recently announced new (in this decade, anyway) guidelines to help business owners (and their favorite HR consultant) figure out who can be an Independent Contractor and who should be a W2 employee.
I still prefer “black & white” … but I do appreciate guidelines, too!
Going into effect on March 11, the new Independent Contractor rule under the DOL’s Fair Labor Standards Act outlines six factors to consider when properly classifying workers. This “Economic Realties Test” – where a business leader determines whether a worker is either economically dependent on an employer for work, or is in business for himself — is a departure from the current DOL guidance, so I want to tell you all about it.
But first …
Here’s a crucial insight that really hit home for me: recent data from the National Employment Law Project (NELP), indicates that a significant 10-30% of us might be misclassifying our workers as independent contractors.
I get the urge to cut costs, and it’s clear that classifying workers as contractors might seem like an attractive way to save money.
I also have several clients who’ve told me that their contractors refuse to become employees. Does that sound familiar?
Classifying your workers isn’t just a mutual decision you make with them – both the DOL and the Internal Revenue Service care very much if you pay someone as a “contractor” when they really fit the mold of “employee.”
So what is the distinction between W-2 employees and 1099 contractors?
W-2 employment is like the classic employer-employee deal. These people dedicate their work hours under your watch, following a set schedule, company rules, and often, making a long-term commitment, or at least a commitment with no specific end date.
Now, enter the 1099 contractor scene- these individuals are often self-employed, serving up specific skills under a contract. Unlike your W2 team, they’ve got the freedom to call the shots on when and where they work.
As for the perks your employees get — besides whatever benefit you offer your employees just to recruit and retain the best, the government also mandates certain safeguards for employees, like retirement plans, paid sick leave, health insurance, worker’s compensation, and unemployment. Employees are covered by employment laws that create a safety net against unfair practices, discrimination, and workplace harassment.
Contractors don’t have these safeguards. Sure, they enjoy the flexibility and freedom, but the benefits game is a bit different. They don’t get the same level or perks and protections as your W2 team. Things like health insurance, retirement plans or paid time off aren’t in the cards for them – and the government is wary when workers aren’t properly protected.
That’s why I think it’s best for you to take a look at this new Six-Factor Economic Realities test form the DOL and figure out where your team members fit before the government does:
- Opportunity for Profit or Loss
Contractors shoulder the potential profit or loss tied to their own work as service providers. In traditional employment, employees don’t generally make a profit or loss themselves – the employer organization does.
- Investments in Equipment
Unlike employees where you cover their work expenses, contractors foot their own business bills. You furnish laptops, software, and other business tools for your employees … contractors own their own equipment already.
- The Degree of Permanence
Employees commit to a (hopefully) long-term relationship, with no determined end date, while contractors are often engaged for specific projects or a defined period. Contractors can also work with multiple clients simultaneously, unlike employees who remain dedicated to a single employer.
- The Degree of Control
You are the one determining their work hours, location, and the specifics of how they get the job done. On the flip side, contractors are more independent, deciding when and where they work.
- Essential to the Employer’s Business
Essential roles are the backbone of your operations. If the work is fundamental to keeping your business run smoothly, it’s likely an employee’s role. On the other hand, contractors are specialists brought in for specific projects or tasks, contributing in a more supplementary or project-based manner, but not central to your everyday operations.
- Worker’s Skill and Initiative
With employees, you are directing how things are done. However, with contractors, you are giving them the autonomy to take the lead. They are expected to use their skills, take initiative, and determine the best methods to achieve project goals.
Got a question or want to talk through the classification of your own workers before March 11? Hit me up for a free 20-minute consultation so we can get this right, together!