DOL Update: What It Means for Construction Companies
The Department of Labor’s update finalizes the independent contractor rule. Construction companies already work with contractors and sub-contractors, and if you don’t abide by these rules, it can lead to some significant financial consequences:
- Entitlement to unpaid minimum wage/overtime
- Legal fines and penalties
- More
Four lawsuits are pending in Louisiana, Georgia, Texas and Tennessee to challenge the changes.
If you work with anyone who may be an independent contractor, you need to follow the rules, which went into effect on March 11, 2024.
What is the Final DOL Rule?
Independent contractors (IC) may be working in an employee capacity, which comes with rules and regulations, such as requiring you to pay minimum wage or overtime. The final rule reinstates the realities test from years ago to help companies correctly classify workers and contractors.
What Associated Builders and Contractors Has to Say
Associated Builders and Contractors (ABC) released a statement on the new ruling and stated that the change from the DOL undermines the flexibility and independent work of millions of workers.
ABC claims that:
- The final rule is difficult to interpret
- Employers will need to “guess” important factors
- The rule will create frivolous litigation and will be expensive and confusing
ABC is right that the rule can be complex and confusing for a non-legal or accounting expert. I’m going to clarify the rule to better help you understand how it applies to the construction industry and what it ultimately means for you.
Examining What Construction Companies Must Know
Preparing for tax season is challenging enough, but when you hire someone as an IC project manager or a contractor, you’re now facing new rules. The DOL requires you to conduct what is known as an economic realities test, which offers six ways of determining who is a contractor or employee.
1. Opportunity for Profit or Loss Depending on Managerial Skill
An IC must have managerial skills that will allow them to have economic success or failure. What does this mean? An IC should have the ability to:
- Negotiate their rates
- Market themselves and businesses
- Hire others
Employees, on the other hand, cannot negotiate rates aside from their raises, nor can they hire others if it’s outside of their job duties. Your employee works for you, but an IC works with you to complete a job rather than being an employee. The IC is, for all intents and purposes, a business.
2. Investments By The Worker and The Potential Employer
Investments by an IC are vastly different than that of an employee. An IC will make investments that are generally for a business function. A contractor may invest in software that helps them reduce the cost of jobs and improve productivity.
Employees may purchase tools for their specific job, but the employer may also provide the tools and equipment.
In the contractor example, the investments are business-like, which indicates the person is working for themselves in a contractor capacity.
3. Degree of Permanence of the Work Relationship
Contractors work on a predefined duration, and while the contract may be extended, it’s not the same as hiring an employee. Employees often work with:
- Indefinite work duration
- Understanding that they work exclusively for the employer
If the person is working on a per-project basis or on a contract with a definite duration, they’re likely a contractor. However, this does not mean that a seasonal worker is an independent contractor.
Instead, you can hire seasonal workers for the busy season with the condition that they will not be with the company for a definite period of time. Why? The employee is not operating as a business and often do not tick off many of the other requirements.
4. Nature and Degree of Control
An IC will have a certain degree of control that many employees do not have. For example, your employee is unlikely to be able to set their own schedules or work with others while working for you.
Multiple factors may be considered, including the individual’s ability to:
- Set their availability
- Work for others
Employers will monitor an employee’s performance and limit their work with others. IC contractors have more autonomy and will be able to set their own hours, too.
5. Extent To Which The Work Performed Is An Integral Part Of The Potential Employer’s Business
One of the confusing tests is that in which the work is integral to the employer’s business. For example, IC performs work that is not central to the principal business, although their work may be critical for certain projects.
Employees work on critical, core aspects of a business, while ICs perform work that is not central to the principal business.
6. Skill and Initiative
Employees and ICs may both bring specialized skills to the employer, but an employee is often trained by the employer, while an IC is not. This point is complex because an employee and IC can both be skilled workers.
However, if the worker uses the specialized skills in a business-like initiative, they’re likely a contractor.
Where much of the confusion exists is that there is no determining factor that makes it a concrete statement that an IC is really an employee. You need to consider the “totality of circumstances,” so more than one of these tests must ring true.
You can read the DOL’s guide on what constitutes an independent contractor or not. Since multiple lawsuits are challenging the rule, it will be interesting to follow the coming rulings and how they may impact classification in the future.
Final Thoughts
Navigating the Department of Labor’s final rule on independent contractors is complex and confusing. You want to keep your company within the guidelines of the law to prevent misclassifying your workforce and ending up with fines and penalties.
The onus is on you to properly classify employees and contractors, so it’s worth spending time understanding the rules or hiring someone to help you through the DOL update.
Speaking of hiring someone to help you, how are you doing when it comes to managing your books?
If you’re looking for help with your bookkeeping, accounting, or payroll, Beyond Books Solutions can help. Contact us here.
