Transcript
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\f0\b\fs48 \cf0 EP 76 - New Employee vs Independent Contractor Rule
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We received this message from a listener a few days ago. \uc0\u8232 \
My business has grown to the point where I need to get some help, but I'm so confused about whether I need to hire an employee, or if I can just pay them as a contractor. Many of my friends in the trade said they don't bother with all that employee stuff, and they just pay their help as contractors, so they don't have to worry about all of those extra taxes and insurance. \uc0\u8232 \
I spoke to my insurance guy, and he said, I would need workers comp insurance, and that it would be pretty expensive in my line of work, so I'd like to avoid that. I think I read about some new rules or something that said, you have to make sure you do this right. I'm a very good carpenter, but when it comes to this stuff, I am at a loss. \uc0\u8232 \
I hope you can help me and others who are out here just trying to make a buck. \uc0\u8232 \
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Hey friends. Do you ever wonder if you're correctly classified as an employee or independent contractor? Well, today on the ask Ralph show, we're going to dive into the details of the fair labor standards act, final rule and employee classification. \uc0\u8232 \
Now that sounds like a mouthful. But it's something that all business owners and even individuals need to know about. \cf2 [00:01:00]\cf0 So get ready to understand the factors that determine whether you're an employee entitled to minimum wage overtime, paying other protections. Or if you're an independent contractor, self-employed. This is crucial information for both workers and businesses. \uc0\u8232 \
So stay tuned as we unpack it together. Now let's get started. \uc0\u8232 \
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Welcome back to the show today, we're diving into the new independent contractor rules, which take effect on March 11th, 2024. So this is something you really need to be aware of right away. Before I get started, don't forget to \cf2 [00:02:00]\cf0 subscribe to the show. And join our email list. You can do that at askralphpodcast.com \uc0\u8232 \
you don't want to miss tomorrow show when we discuss healing, your finances. You know, our Sunday shows are always a little more spiritual. And tomorrow we're going to talk about healing, your finances. So let's get started on today's topic. \uc0\u8232 \
The fair labor standards act or commonly called FLSA for short. Is the federal law. And that federal law sets minimum wage overtime and other standards intended to protect workers. \uc0\u8232 \
I mean, that's the whole goal of it. But it only applies to employees, not independent contractors, that it might seem like a contradiction, but let me continue. With so many people working in the gig economy. Properly classifying workers has become more complex. You are aware of, you know, Uber. DoorDash, all those kind of things in a gig economy have made this more complicated. \uc0\u8232 \
So in 2020. The department of labor issued its final rule. And what did they say? They clarified the test to \cf2 [00:03:00]\cf0 determine whether a worker is an employee. Under the F L S a. Or an independent contractor. And that's what we're going to talk about today. And this impacts anybody who's in business or people who are looking to work for a business. This final rule uses, what's called an economic reality test. \uc0\u8232 \
And what it does is evaluates the economic dependence between a worker and a potential employee that's its core. So at its core, the test analyzes whether as a matter of economic reality, A, worker is dependent. On an employer for work or is truly operating their own independent business. Now. The final rule, identify six factors that shed light on the economic relationships. And guide the classification analysis now. That said. What the F L S a has said is no single factor determines the outcome. But based on the overall balance, a determination can be made. \uc0\u8232 \
We'll talk about some examples later in the show. \uc0\u8232 \
So let's get into these factors. \uc0\u8232 \
The first factor is opportunity for profit or loss, depending on \cf2 [00:04:00]\cf0 managerial skill. This factor favors employee status. If the worker does not control important aspects of the work that affect their earnings. For example. If the potential employer sets the rate of pay per job. And a worker doesn't negotiate rates or solicit additional business. \uc0\u8232 \
So if you are a person that is told to show up to work from 8:00 AM to 4:00 PM. You're told you're going to be paid a certain wage, then you're probably not going to pass this first factor. However, if the worker exercises business like initiative to increase profits such as marketing services or making costs, reducing choices. That indicates independent contractor status. \uc0\u8232 \
Let's move on to factor number two. The second factor considers the relative investments of the worker and a potential employer. Large capital investments by the worker like purchasing equipment. Renting office space. That allows them to operate independently, suggest independent contractor status in contrast. Limited \cf2 [00:05:00]\cf0 investments by the worker indicate economic dependence on the potential employer. So think about that. If you hire somebody to come and work in your office. You're going to provide them with a place to work. \uc0\u8232 \
They're not renting space. You're going to provide them with a telephone computer. Probably office supplies. So that more. More or less looks like an employee relationship, not an investment, not an independent contractor status. \uc0\u8232 \
Let's move on to factor three. The factor three evaluates to permanence and exclusivity of the working relationship. Sporadic or non-exclusive work arrangements, point to independent contractor status while indefinite continuous Or exclusive relationships suggest to workers and employee. Let's use our same example. If I hire a person to work at my front desk. Well, they're going to show up every day. The thought process is this is going to be a longterm employment situation. \uc0\u8232 \
However, Let's say that I hire someone to come in and. Fix a plumbing repair. Well, that obviously is sporadic, that's not going to be \cf2 [00:06:00]\cf0 everyday. I hope I'm not having plumbing repairs every day. \uc0\u8232 \
So let's move on to the fourth factor. The fourth factor looks at the nature and degree of control exercised by the potential employer over the worker. \uc0\u8232 \
Control over the hours, location and standards for work generally indicate employee status. Yet control arising from complying with government regulations does not necessarily evidence employee status. So think about that one in our same example. \uc0\u8232 \
You're going to tell this person what time they're going to work and what time they're going to start. \uc0\u8232 \
You're going to tell them where to report. And you're going to tell them what your expectations are as to the standards of their work. \uc0\u8232 \
So let's move on to factor number five. Factor number five, considers whether the work is integral to the potential employers business. If the service is, are a critical part of the potential employers operation. This leans towards employee status. But if the work is ancillary to the business, this suggests independent contractor status. Using our same example. \uc0\u8232 \
If I hire a front office person, That's absolutely \cf2 [00:07:00]\cf0 critical to the success of my business. people are going to judge your business in the first 30 seconds of when they come in the door. So that person is definitely a critical part. So it leans more towards being an employee. However, like we talked about in our other example, If I have a plumber that comes in now, that might be critical for that day, because maybe we got a toilet backed up or a sink that's overflowing all over the floor. But it's not a critical part of the business. \uc0\u8232 \
So let's move on to the last factor and that's factor number six. Factor number six, examines skills and initiative. If the worker uses specialized skills in a way that demonstrate business initiative. Like to generate additional business that indicates independent contractor status. So using our same example. If I hire someone to come in and work every day. They may not have specialized skills. But let's say I hired somebody to come in. To help me with my marketing plan. That could be a specialized skill. they come into work for a sporadic time to come in. \uc0\u8232 \
\cf2 [00:08:00]\cf0 Occasionally. To work on a marketing plan for me. So beyond these six factors, other relevant indicators of economic dependence may also be considered in the analysis. Now some of this is legal speak. You know, this is the FLS a telling you what to do. The overall determination depends on the economic reality, not the label apply to the relationship. And that's the key. \uc0\u8232 \
See, a lot of people like this guy mentioned in the call, he sent over to us. A lot of people just say, well, Ralph, I'm just going to call them independent contractors. Well, of course, you're going to do that. It's to your benefit economically. you're not going to have to cover them with workers' comp insurance. You're not going to have to pay matching social security, Medicare tax, but just because you label somebody that, and listen, I'd deal with this every day. I have a new client come in and now say Ralph. Here's my profit and loss for last year. \uc0\u8232 \
Can you do my taxes? And I'm looking through this and I see independent contractors. And I see this huge number under there. And I see to them. Okay. Well, did you give these people 1099's nines? Oh, yeah. \cf2 [00:09:00]\cf0 Yeah. Somebody mentioned that, but yeah, I just really didn't get around to it. I said, well, tell me what these people do. Well, they work for my business every day. \uc0\u8232 \
You know, I'm a carpenter like this guy. Carpenter I'm out there banging, you know, nails into the wood, cutting wood. I said, okay, well, do these people have their own tools and equipment? Well, no Ralph Day, you know, I provide all that. Okay. Do they set their own hours? Well, of course not Ralph. I tell them to get there at eight and we leave at four. You know, do they have their own license and insurance? \uc0\u8232 \
Well, no, they can't afford her license and insurance. And I said the economic reality in that case is these people are not independent contractors, they're employees. \uc0\u8232 \
So let's talk about some examples that help illustrate these factors. Here's the first one. \uc0\u8232 \
A plumber who works full time for a plumbing company is assigned jobs by a supervisor. Uses the company's tools. And is prohibited from taking outside jobs as likely an employee based on control. Permanence lack of investment, et cetera. Pretty clear as we talked about, the plumber that comes into my \cf2 [00:10:00]\cf0 business to fix the toilet or fix the sink. No. \uc0\u8232 \
Wow. That's not a thing. That's, it's very important. But it's definitely, that person is a subcontractor than me, but from the plumber standpoint, They're an employee of the plumbing company. \uc0\u8232 \
Let's look at another example. A graphic designer who works for multiple design firms sets their own hours and rates per project. Invests in software and equipment for their home office. And actively advertises services Likely qualifies as an independent contractor based on initiative. Control. Lack of permanence and the investment made. It's pretty clear cut situation. \uc0\u8232 \
Like we talked about. The example that I gave was the marketing person. they're buying their own equipment, software. They're setting their own rates. They're putting in their own hours. \uc0\u8232 \
Let's move on to another example. That's a cake decorator. A cake decorator who works regular hours at a bakery. Uses the store's kitchen supplies and cannot accept outside cake orders would lean towards an employee status. Based on \cf2 [00:11:00]\cf0 exclusivity of work and lack of independence, of course. if you work at a bakery, You're not bringing your own oven. You're not bringing your own mixers and all that sort of thing. \uc0\u8232 \
You're an employee it's pretty, pretty cut and dry. \uc0\u8232 \
How about this one? A freelance writer who pitches articles, to various publishers, negotiates rates per piece. Works when and where they choose and realize on their own laptop and Expertise is exhibiting contractor characteristics like initiative control and skill. \uc0\u8232 \
Again, this is a freelance person. They're setting their own timeframes. They're negotiating their own prices and rates. \uc0\u8232 \
And finally, let's take a look at this one. And this is directly what we talked about earlier. That the caller was asking about. A construction worker who provides services. Full-time at a job site. Using the general contractors tools and materials. And does not set schedules or negotiate pay. Is most likely an employee. \uc0\u8232 \
They lack independence and control. \uc0\u8232 \
So to sum this up. The \cf2 [00:12:00]\cf0 determination depends on the totality of circumstance. You can't just look at one thing. I hope these real world examples, give you a good sense of how the factors are applied and weighed in practice. So you can assess whether a worker is truly in business for themselves or dependent on an employer. If you have further questions, let me know if you need any clarification. \uc0\u8232 \
I can walk you through additional examples. You can visit me at askralphpodcast.com/ store. And you can schedule a consultation with me. \uc0\u8232 \
So why does all this matter? Why do worker classifications matter? Well, here's the deal. Employees receive protections under federal and state employment laws that independent contractors do not. \uc0\u8232 \
What are those things Ralph? Well, as employees, workers are entitled to minimum wage. Overtime premium pay. Unemployment insurance. Workers' compensation insurance paid leave and non-discrimination and retaliation protections. On other hand. Independent contractor, self-employed business owners who do not receive these same protections. \uc0\u8232 \
Why is this \cf2 [00:13:00]\cf0 important? Misclassifying employees as independent contractors also hurts employers. Well, why is that Ralph well it deprives state and federal authorities of payroll taxes and unemployment insurance contributions now. I think one could argue. Whether that's, hurting employers. Certainly hurting their bank account. \uc0\u8232 \
Yeah. They don't have to pay for these things, but you have to do it right. Misclassification exposes businesses and lawsuits for denying workers, their proper rights and protections. And I think that is the key. You're going to set yourself up for a potential lawsuit. If you don't do this correctly. \uc0\u8232 \
And I hadn't even got into the whole discussion about insurance and liability. So the stakes are high. You've got to examine your own situations carefully. In light of these economic reality factors pay attention. To how much control you have over your work and opportunities for profit compared to the businesses benefiting from your services, and again, seek out additional guidance. \uc0\u8232 \
If you're unsure of your employment status. A proper classification provides security for both \cf2 [00:14:00]\cf0 businesses and workers. \uc0\u8232 \
Now, before we wrap up today, I want to remind all of our listeners to visit our podcast page. That's at askralphpodcast.com. There you can leave a review. You can share your thoughts like this person did today. \uc0\u8232 \
I love getting these messages. It lets me answer questions that are relevant to our listeners. that's where we get our questions for future episodes, while you're there. Make sure you join our email list. We're trying to grow that so we can let you know about things coming up on this show. \uc0\u8232 \
And as a way to do that, we're offering a $25 weekly Amazon gift card drawing. So if you don't have your email there, you're not going to win. So tell other people about it as well. And like I said, you can schedule a consultation with me there as well. If you wish. And we can talk about your specific circumstances. \uc0\u8232 \
So to recap. The first factor, evaluate opportunities needs for profit or loss based on the worker's managerial skills. More business, like initiative indicates independent contractor status. \uc0\u8232 \
The second factor examines investments made by the worker versus the employer. Significant investments by the worker suggest independent \cf2 [00:15:00]\cf0 contractor status \uc0\u8232 \
factor three. It looks at a permanence and exclusivity of the work relationship. Sporadic or not exclusive work points to independent contractor status. We talked about this, \uc0\u8232 \
the fourth factor considered the employer's control over the worker. More control indicates that they're an employee \uc0\u8232 \
factor five assess whether to work as integral to the employer's business. \uc0\u8232 \
And I think honest people could disagree about that. But critical work suggests employee status and \uc0\u8232 \
finally factor six looks at the worker skill and initiative in generating business. Specialized skills use with business initiative indicate independent contractor status. The multi-factor economic realities test determines whether a worker is truly in business for themselves are dependent on employer. \uc0\u8232 \
And again, Proper classification provides protections for both workers and businesses. \uc0\u8232 \
So in closing, I hope this overview gave you a better grasp with a multi-factor economic reality test. And that's a lot of words. But it's important that we do this to determine whether a worker qualifies as an employee. \cf2 [00:16:00]\cf0 And therefore will be subject to the FSLA or is truly an independent contractor. \uc0\u8232 \
You can get educated on the F L S a final rule. You can go to their website. And again, Visit our website. If you want more information about this and other business topics, we have over 300 episodes out there for you to download and listen to and you to make sure you like us on all those social platforms and subscribe to our show. \uc0\u8232 \
And remember. I always end the show like this. Stay financially savvy. Learn be aware of what's going on and God bless you. \cf2 [00:17:00]\cf0 }
