The U.S. Department of Labor recently helped clarify the classifications between independent contractors and employees. Many employers and freelance contractors have wanted a better distinction between what constitutes the difference. This document is the final rule on that issue.
Some employers preferred classifying contractors as non-employees because it would save them a lot of money since they would not have to pay them overtime or give employee benefits. Calling them contractors also let them not have to withhold taxes and would enable them to let them go without any reason.
The New Rule Could Affect Many
The new independent contractor rule was released in January 2024. Many people were looking for it—while others feared for their status. Investopedia says it could change the classification of as many as 22.1 million Americans.Workers such as Uber, Lyft, DoorDash drivers, writers, and others may find that the new rule affects their status. The rule came into effect on March 11 of this year. Lawsuits appeared almost immediately because they would significantly change the income and profits of employers and contractors.
- Opportunity for profit or loss—based on their business knowledge or ability.
- Investments by the worker and the employer—Do they invest in expanding their business like an employer?
- Permanence of the work relationship—Is the relationship limited by time or project?
- Nature and degree of control—Does the person determine their schedule, quality of work, or salary?
- Is the work performed integral to the employer’s business—Is it necessary to the business—or is it an independent function?
- Skills and initiative—Does the person bring specialized knowledge and skills to the task, or are they learned from the employer?
Past Violators Could Be Prosecuted
In 1938, the Fair Labor Standards Act (FLSA) created the original laws that distinguished employees from contractors. It is the task of the Department of Labor to enforce the FLSA. The new ruling, McClane says, could mean that employers who violated the rules in the past could owe back pay, overtime pay, and out-of-pocket expenses and may face criminal penalties for misclassifying employees.Industries Impacted the Most
The change in the laws will impact some industries more than others. Two industries likely to be affected the most are health care and construction because they regularly practice misclassification. FinanceBuzz says other industries that will be affected most include rideshare and delivery services, nannies, task services, dog walkers, and personal chefs.Your Income From Side Hustles May Be Reported to the IRS
If you are not a 1099 employee but receive your pay through places such as PayPal, Stripe, or Venmo, you may be surprised to discover your income has already been reported to the Internal Revenue Service (IRS). You must keep accurate records of your income and expenditures as a self-employed independent contractor. You must pay taxes from your side hustle, and you will have to pay all of them because there is no employer to take them out for you.Working Seniors May Face a Reduction in Social Security Benefits
Seniors getting Social Security benefits and earning a separate income may have reduced benefits if they make too much money. The Social Security Administration says you can earn up to $22,320 in 2024 without any penalties. Any amount above that will be taxed and you will have your benefits reduced by $1 for every $2 you earn. In the year you reach full retirement age, you can earn up to $59,520, and any money earned above that amount reduces your Social Security benefits by $1 for every $3 you bring in.How the New Rule Could Affect You
Depending on the industry you work in, you may find that you could start getting some new benefits, along with higher pay. On the other hand, you may find yourself without a job if the company you contract with is not willing to pay more.
The changes are already in effect, so you should have already been notified one way or another as to what may happen. There are still many gig-type jobs that the rule will not impact or may impact only minimally, so you just may need to find a new one to pull in a similar amount of income.
Before you take on a new gig job or enter new contracts as an independent contractor, be sure to find out how the new rules might impact you. Make sure everything is in writing and avoid unscrupulous employers.
