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New DOL Rule Revises Classification of Employees vs. Independent Contractors

New DOL Rule Revises Classification of Employees vs. Independent Contractors

Following a new DOL rule, if your business issues workers with 1099s, you're likely misclassifying them and opening yourself up to liability, including personal liability.

The U.S. Department of Labor issued Tuesday a final rule revising its guidance on who is considered an employee and who's an independent contractor, under the Fair Labor Standards Act (FLSA).

This final rule rescinds the prior rule published in January 2021 and replaces it with an analysis for determining employee or independent contractor status that is more consistent with the FLSA, as interpreted by longstanding judicial precedent.

It is now more likely that the DOL will consider a worker to be an employee rather than an independent contractor.

New York State has always had a higher threshold for determining if a worker is a legitimate independent contractor, including special rules for specific industries, like construction.

It can be tempting to classify workers as independent contractors, to save on expenses such as payroll taxes and workers’ compensation. Some workers even request this classification for their own reasons.

This arrangement may work in the short term, but something as simple as an unemployment insurance or workers’ compensation claim by one of these workers can trigger an audit by the Department of Labor (federal or state).

The employer may be found liable not only for unemployment and workers’ compensation premiums for the worker in question, but for all other “similarly situated” workers.

If such workers were not receiving overtime pay due to their misclassification as exempt independent contractors, this may also lead to liability under the FLSA and state overtime laws.

As with most employment-related violations, there may also be personal liability, especially if it's an owner-managed small business.

If your business has 1099 workers, you should proactively review your particular situation with a qualified attorney to decide whether they should be re-classified as employees.

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