It’s critical for a company to know who is and isn’t considered an independent contractor, as the distinction can have a significant impact on both workers and a business – specifically when it comes to workers’ compensation and labor laws.
Recently, with the influx of freelance or “gig economy” workers, there have been a number of key changes in how employers can best determine someone’s possible independent contractor status. Here, we’ll look at the difference between the two types of workers, the importance of knowing which is which, and some very recent changes in U.S. Department of Labor laws.
Employee vs. Independent Contractor
Simply put, an employee is an individual hired by a company to provide services in exchange for compensation. An employee is bound by a contract of employment and the employer has control over the activities of the employee. In contrast, an independent contractor (also known as a subcontractor, 1099 contractor or freelance worker) is an individual who works independently to provide services, and who works for a set fee without employee status.
Unlike employees, independent contractors are not entitled to company-sponsored benefits, can accept or reject assignments at will, and typically work for many different companies. Typically, a worker cannot be an employee and an independent contractor for the same company. In some cases, a business may have employees and independent contractors filling different roles.
Why It’s Important to Know the Difference
Workers’ compensation allows an employee who becomes ill or is injured while on the job to receive medical care. It also provides disability income when an employee becomes injured or ill as a result of performing his or her job. It’s important for your business clients to understand what defines an independent contractor or subcontractor, because errors pertaining to workers’ compensation and employment laws could make them subject to liabilities, fines and penalties, as well as uncovered medical bills and judgments.
Except for Texas, where coverage is optional, it is mandatory for every employer in every state to offer workers’ compensation coverage to its employees. What this means is that employers in states other than Texas must offer coverage to workers who fit the classification of an employee of the company. If an employer does not comply with this requirement, an employee who is injured on the job can sue the company for damages that can include medical bills, loss of wages, disability income, and even death benefits and funeral costs in the event an employee is fatally injured while on the job. Independent contractors, however, are not direct employees of a business; therefore the company isn’t required to provide workers’ compensation coverage.
Independent Contractor Rule Recently Withdrawn
On May 6, the U.S. DOL withdrew the independent contractor rule that was set to go into effect on May 8 but was then delayed and eventually withdrawn by the Biden administration.
According to the DOL, the three primary reasons behind the retraction were:
- Tension with the FLSA purpose and relevant judicial precedent.
- The rule’s prioritization of the core factors used in determining employee status under the FLSA.
- Overly restrictive considerations when determining whether a worker is an employee or an independent contractor and resulting in workers losing FLSA protections.
For now, the DOL is reverting to a prior employee classification test that companies can use in the interim when determining the possible independent contractor status of a worker. According to the Direct Employers Association, the Biden administration does not intend to issue a new independent contractor test under the FLSA that could prove to be more restrictive toward businesses that are interested in securing independent contractors. Today, as employers continue to face uncertainty around the issue of determining independent contractor status, they must remain current as to potential new developments.
While this can be a complex topic, the bottom line is that your employer clients must understand the specific criteria that defines who is and is not considered an employee under a company’s state work comp laws, to avoid the possibility of misclassification and lessen their risk exposure.
We serve a broad spectrum of businesses and industries, providing workers’ compensation for operations with debit and high experience mods, new ventures with no mods and multistate exposures, as well as excess markets for companies that self-insure. To learn more, please contact Ana Sims at (707) 535-2510 or email firstname.lastname@example.org.