Using Independent Contractors, Part 2: Avoiding Regulatory Pitfalls (Warning: Rules Changed This Year!)

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Using Independent Contractors, Part 2: Avoiding Regulatory Pitfalls (Warning: Rules Changed This Year!)

Thinking about your workforce as we head into 2024? Of course you are! A company’s biggest expense, other than rent, is usually their employees, so as you’re thinking about that expense for the new year, you may be contemplating moving from independent contractors to employees, or employees to contractors. I talked about the pros and cons here.

But wait, there’s more. There are very specific rules you have to follow for each type of worker. Those rules are determined by the U.S. Department of Labor, and they changed in 2023. I’ll say that another way: THERE ARE NEW RULES YOU NEED TO FOLLOW if you want to use independent contractors.

The rules generally concern what defines a contractor vs. an employee. Questions to ask include: Are they compensated by project or by their time? Do they have control over their own time/schedule/location and the way they manage it (which employees, arguably, don’t)? 

Here are new gems from the new rules: Could your business survive without this person? Is this person mission-critical to your company? 

Then there’s: Are people doing the same thing being treated the same way? In other words, say you have two graphic designers working for you, and one is an employee working 30 hours a week, and one is a contractor working 30 hours a week. There needs to be a significant difference, meaning the contractor who is working 30 hours a week should be able to prove they have five other clients.

The new rules also would reclassify workers who are economically dependent on a company. While I find this silly, because, arguably, contractors are economically dependent on every single one of their clients, the Department of Labor is basically raising the possibility that however many clients a contractor has, they should be part-time W2 employees. I’m telling clients to take a deep look if they’ve been using the same contractors for multiple years or if their company is the contractor’s only source of income. That is a very bad look. It’s also a yellow flag for the Department of Labor — as is a company that generates a lot of revenue consistently over time but has no employees. 

Let’s face it: COVID changed the game for worker flexibility, and now the Department of Labor is making the rules more stringent to match. Whatever classification you choose for your workers, it must be defensible under the new rules.

As my gift to you this holiday season, here is a summary of the TLDR version of the Department of Labor’s rules: 

• Independent Contractor (IC) status is supported if:
  • They determine or can meaningfully negotiate their rate
  • They can accept or decline jobs or choose the order and/or time in which the jobs are performed
  • They engage in marketing, advertising, or other efforts to expand their business and secure more work
  • They make decisions to hire others, makes purchases and/or rent space
  • The work relationship is definite in duration, non-exclusive, project-based, or sporadic
• Independent Contractor (IC) status is NOT supported if:
  • Their clients set their schedule, supervises the performance of the work (THIS ONE’S TRICKY!), and reserves the right to discipline
  • Their clients limit their ability to work for others or places demands that don’t allow them to work for others (BE CAREFUL WITH NON-COMPETES), controls the prices or rates paid; or uses tech means to supervise (such as Slack that require the worker to be available when contacted)
  • If the function is an integral role in the engaging party’s business (ALSO TRICKY!) — such as the managing director or head of accounts.
  • If the IC does not have specialized skills.

If I haven’t yet made this clear: There will be A LOT more scrutiny around this in the coming year, and we want to avoid, at all costs, yellow flags that can lead to… I won’t even say it. Call me. We’ll talk.

More articles:

Using Independent Contractors, Part 1: Pros and Cons

Employee or independent contractor? Let's have the conversation.