3 Important Labor Laws and Regulations for Independent Contractors

Laws and regulations for independent contractors are complex. Legally, a company can’t just decide that a worker qualifies. Instead, the arrangements need to align with set criteria, ensuring that a worker isn’t misclassified as a contractor when they should be considered an employee.

Additionally, certain regulations that apply to employees don’t apply to independent contractors. At times, this can lead to some confusion for companies, particularly since being on the wrong side of the rules can come with serious consequences.

With that in mind, here are three important labor laws and regulations for independent contractors.


1. IRS Criteria for Defining Independent Contractors

The Internal Revenue Service (IRS) has strict criteria regarding who does and doesn’t qualify as an independent contractor, aiming to ensure that each worker is properly classified. Often, the IRS looks at three significant factors to determine a worker’s classification.

First, the IRS considers how much financial control the worker has over certain aspects of the arrangement. This can include whether the person can dictate how they are paid, whether expenses are reimbursed, and who is supplying the needed tools or equipment for performing the tasks.

Second, the IRS examines how much control the company has over the worker’s behavior. For example, does the business have the option of dictating what the worker does or how they handle their assigned tasks?

Third, the nature of the relationship is taken into consideration. The IRS looks at whether there are written contracts as well as if the worker is receiving benefits that are usually given only to employees (insurance, retirement, paid time off, etc.). Additionally, they explore the likelihood of the relationship continuing as well as if the tasks being handled are a critical part of the company’s business.

No single factor determines whether the IRS will see the worker as an independent contractor. Instead, they examine each point as part of a whole, deciding based on the arrangement in its entirety.

Misclassifying a worker as an independent contractor when they should be an employee has serious consequences, both legal and financial. As a result, it is critical to make sure that the arrangement qualifies based on the IRS criteria.

2. Required Tax Forms

Even if a worker isn’t an employee, that doesn’t mean the company doesn’t have tax reporting obligations. While organizations don’t have to pay certain costs, like Social Security, for independent contractors, they do need to track how much is paid and issue a tax document when appropriate.

If an independent contractor receives more than $600 in a tax year from your company, you typically need to provide a 1099-MISC to show their total earnings. This needs to be submitted to the IRS and sent to the worker no later than the end of January for earnings during the preceding year.

3. Department of Labor (DOL) Regulations

The Department of Labor (DOL) uses similar criteria as the IRS to analyze whether an arrangement qualifies for independent contractor status. Additionally, like the IRS, they use a holistic view, examine each one to determine eligibility.

If a worker is an independent contractor, specific DOL regulations do not apply. Since the relationship between an independent contractor and a company differs from the employee/employer relationship, Fair Labor Standards Act (FLSA) provisions do not apply to the arrangement. This includes parts of the regulation that outline minimum wage requirements as well as overtime standards.

Additionally, the Americans with Disabilities Act (ADA), unemployment compensation rules, workers compensation regulations, and Occupational Safety and Health Act (OSHA) also don’t apply to independent contractors.

Ultimately, the independent contractor classification can be hard to navigate. If you want to avoid these concerns, partnering with an MSP can help ensure your contingent staff is properly managed based on applicable laws and regulations. If you’d like to learn more, the team at Apogee Managed Solutions can help. Contact us to speak with one of our experts and see how our services can benefit you.

 

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