As you may recall, on January 9, 2024, the U.S. Department of Labor issued a final independent contractor rule that went into effect on March 11. This revised worker classification is significantly impacting the construction industry, so it is essential that you understand it and enact policies to comply.
Details of the Rule
This new rule rescinded the 2021 Independent Contactor Rule. According to the Department of Labor, the new mandate will protect workers’ rights as outlined in the Fair Labor Standards Act (FLSA). In addition, it better aligns with judicial precedent for categorizing workers as either employees or
independent contractors.
What the New Rule States
The final rule uses a multifactor analysis, not an ABC test, to determine worker classification. As listed on the DOL website, the six factors are as follows:
opportunity for profit or loss depending on managerial skill
investments by the worker and the potential employer
degree of permanence of the work relationship
nature and degree of control
extent to which the work performed is an integral part of the potential employer’s business
skill and initiative
Keep in mind that you must consider all six factors, and none has more weight than another.
Also, some states still use the ABC test, so you must comply with those guidelines depending on where you live. Per the ABC test, workers are considered independent contractors if the following statements
are all true.
The workers are free from the company’s control or direction.
The workers perform work deemed outside the employer’s usual business.
The workers are engaged in an independent trade, profession, occupation, or business.
Weighing the Classification Factors
You may rely heavily on tradespeople and subcontractors, so navigating this new rule can seem challenging. For example, if workers have specialized skills and their services are sporadic, those factors seem to indicate independent contractor status. In contrast, members of your crew probably are told what hours to work, are supervised by your managers, and use company equipment, so they should be classified as employees.
If you are unsure about the factors and how to consider them, the FAQs on the DOL site may be helpful.
How to Enact the Rule at Your Company
Once you understand those factors, you must create a compliance plan for your business. Some action items include the following:
Review your list of employees and other workers. For those classified as independent contractors, apply the factors listed above. Reclassify as needed.
Create groups of workers who perform similar work and compare their pay.
For each group, take a hard look at any pay gaps. Such gaps may be legitimate if they are due to varying skills and responsibilities.
Look closely at any pay disparities across gender and race. Address those to avoid discrimination
liability.
Review all your contracts with subcontractors and determine if they are categorized correctly. Recategorize them as needed.
Keep in mind that from an operations viewpoint, it is more advantageous to pay a company instead of an individual.
If you have workers in multiple states, ensure you are using the correct criteria for classifying them.
Be prepared to answer questions from your workers about categorization and how you decided their status.
Final Thoughts
Determining the correct classification for your workers may seem difficult, but it is critical that you consider all the factors carefully. Complying with the independent contractor rule is a legal requirement for your company.
Ultimately, we recommend mitigating your risk where possible by making sure you have up to date subcontracts and independent salesperson agreements. While these documents don’t define the relationship between the parties, they can help.
In addition, there are a variety of steps you can take internally to increase risk mitigation and ensure a greater level of independence, such as making sure to pay companies not individuals, avoid having subcontractors use your branded gear, allow 1099s to work for others, etc. Again, none of these will
definitively solve the problem, but it does help with the analysis.
The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.
Trent Cotney is a partner and Construction Practice Group Leader at the law firm of Adams & Reese, LLP and NRCA and NTRCA General Counsel. You can reach him at tcotney@cotneycl.com or 866.303.5868.
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