Finance News & Insights

New Fed ruling will change the way you pay independent contractors

You may be able to safely classify more workers as independent contractors, thanks to a new ruling by the National Labor Relations Board (NLRB).

The NLRB just reversed an Obama-era position on worker classification, sending you and your peers back to the traditional common-law test to figure out whether someone belongs on your payroll or not.

And it’s giving you some clarification on what the role “entrepreneurial opportunity” plays in your decisions.

Here’s what you need to know about the new decision and how it impacts your use of this cash-conserving staffing strategy.

Drivers were ‘entrepreneurs’

In this specific case, SuperShuttle DFW, Inc, a group of drivers were determined to be independent contractors, reversing a previous decision that classified these folks as employees.

What tipped the scales? Several factors, including:

  • the drivers leased or owned their work vans
  • their method of compensation (an upfront franchise fee plus a weekly flat fee), and
  • the fact that they had the flexibility to work as much as they wanted, when they wanted.

All of those, said the NLRB, gave them “significant entrepreneurial opportunity for economic gain” which made them independent contractors.

And that’s where the shift comes in from how you’ve been looking at workers for the past five years. In a 2014 NLRB decision, FedEx Home Delivery, the board substantially downplayed the entrepreneurial factor. But that’s all changed now.

What you have to consider (again)

So we’re going back to criteria from 1968. The next time you’re trying to figure out how to classify and pay someone, consider the common-factor test:

(a) The extent of control which, by the agreement, the master may exercise over the details of the work.

(b) Whether or not the one employed is engaged in a distinct occupation or business.

(c) The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision.

(d) The skill required in the particular occupation.

(e) Whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work.

(f) The length of time for which the person is employed.

(g) The method of payment, whether by the time or by the job.

(h) Whether or not the work is part of the regular business of the employer.

(i) Whether or not the parties believe they are creating the relation of master and servant.

(j) Whether the principal is or is not in business.

Businesses get popped for missteps on this front all the time. And there are plenty of pitfalls to fall into – often with very costly consequences. So make sure everyone from hiring managers to Payroll and A/P understands what the current determining factors are so unintended misclassifications don’t happen at your company’s expense.

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