If small-business owners didn’t have enough to worry about, the U.S. Labor Department just added one more thing to keep us up at night.
On July 15, the Wage and Hour Division issued a 15-page memo that’s meant to help companies better determine when they may legally classify workers as independent contractors. The implications of that decision can be huge – and fraught with legal consequences.
Mason Alexander, a partner in the Charlotte law firm Fisher & Phillips LLP, said business owners should exercise caution before classifying workers as independent contractors.
“Really, an independent contractor is an independent business,” he said. “If the model fits, it’s fine, and it’s a good idea. The problem is, people assume that they can agree that someone is going to be an independent contractor, and you can’t. You’ve got to have the right facts.”
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While the new Labor Department memo does not change the underlying laws that define independent contractors, it does make clear that the federal government will use a narrow definition when disputes arise.
This issue of worker classification is an important one. Because independent contractors are not employees, companies that use them are not required to meet certain financial obligations related to those workers: paying employment taxes, withholding state and federal income tax, and paying into unemployment insurance funds, for example.
In recent years, as the U.S. economy has seen a shift toward more independent workers, the federal government has been cracking down on companies that it believes are misidentifying workers.
While big companies generally can afford consultants to help them navigate employment issues, not so much with small-business owners who face the similar challenges. That’s why reading the memo is so important.
The Labor Department uses the memo to outline various scenarios under which a worker may legally be classified as an independent contractor. Courts and the federal government typically use multiple factors to determine whether a worker is economically dependent on an employer or in business for him or herself.
Alexander said employers that get it wrong are putting themselves and their businesses in jeopardy.
“My advice to small business owners would be, be very, very careful in using the independent contractor model,” he said.“It may not be the Labor Department that comes after you; it may be the IRS.”
Glenn Burkins is editor and publisher of Qcitymetro.com, an online news site. He is a former Wall Street Journal reporter and Charlotte Observer business editor.