Definition of a “Contractor” Shrinks While the Definition of an “Employee” Expands By Kurt D. Kelley, J.D.

Prior to leaving office, the Trump administration filed a regulation designed to simplify the definition of which workers are employees versus contractors as defined by the Fair Labor Standards Act. In many cases, it would have broadened the definition of a Contractor as well. The regulation was to take effect on March 8th, 2021. However, the Biden Administration sought to delay its effective date. After further review, the proposed regulation change was withdrawn. The U.S. Secretary of Labor, Marty Walsh said, “Too often, workers lose important wage and related protections when employers misclassify them as independent contractors.” 

From a business owner’s perspective, this means the definition of which workers are classified as employees remains broad. The workers’ classification as either an “employee” or “contractor” remains defined by a review of the totality of circumstances of the working relationship. The key factor remains whether the worker is economically dependent on work with the hiring party. Other factors include how they are paid, how their taxes are paid, whether they control their own time schedule, if they do work for others, if they use their own tools, if they deploy skills or education learned independently of work, and the amount of control the hiring party retains over their work. 

Business managers should be careful to properly categorize and pay workers. Employees are to be compensated under the Fair Labor Standards Act where minimum wage, hours worked, and overtime rules apply. Improper payment by the employer can result in fines, an award of back pay and legal fees. Furthermore, in almost every state, it is required that employees be covered by workers compensation insurance. Employers that do not carry this insurance are still required to pay benefits provided by workers compensation insurance when workers are hurt on the job. 

While there are multiple penalties for misclassifying employees as contractors, outside of additional administrative costs, there are no penalties for misclassifying contractors as employees. Managers should seek to properly classify these workers; lean toward calling workers employees rather than contractors and carry workers compensation insurance if you have any employees. When contract work is the obvious choice and no insured contractors are available, consider adding the workers as employees to have them covered by your workers compensation insurance while they are on the job.