Incorrect classification of your workers can be a serious and costly issue in the construction industry, with far-reaching implications for your business. As either an employee or an independent contractor, proper worker classification is crucial for ensuring compliance with labor laws, protecting workers’ rights, and promoting a fair and competitive business environment.
How Should I Mitigate Risks?
Construction companies should regularly review their employee classification practices to ensure compliance with applicable laws and regulations.
The U.S. Department of Labor recently revised regulations addressing how to analyze whether a worker is an employee or an independent contractor under the federal Fair Labor Standards Act. This regulation is effective as of March 11, 2024.
The U.S. Department of Labor’s final rule on worker classification emphasizes an economic reality test with six factors, focusing on whether the worker is economically dependent on their employer. This means that if the worker is dependent on the employer for their work, they are likely an employee, while if they are in business for themselves, they are likely an independent contractor.
Here is the six-factor test to consider when determining worker classification:
1. Opportunity for profit or loss depending on managerial skill.
Does the worker exercise managerial skills to earn profits or suffer losses through independent effort and decision making? Does the worker negotiate their pay, decide to accept or decline work, hire workers, purchase material and equipment, or expand their business through marketing or advertising? If yes, that worker appears to be an independent contractor.
2. Investments by the worker and the employer.
Does the worker use their own personal equipment, tools, and materials to perform the job they were hired for? If yes, that worker will likely be classified as an independent contractor.
3. Degree of permanence of the work relationship.
What is the nature and length of the work relationship? Is the work sporadic or project-based with fixed end dates> Can a worker make a business decision to take on multiple different jobs? If yes, this may indicate independent contractor status.
4. Nature and degree of control.
What is the level of control the potential employer/independent contractor has over the performance of the work and the economic aspects of the relationship? Can the potential employer/independent contractor control hiring, firing, scheduling, prices, or pay rates? Can they supervise the performance of the work, discipline workers, and limit a worker’s ability to work for others? The site that maintains more control over these aspects of the work relationship determines a worker’s status.
5. The extent to which the work performed is an integral part of the employer’s business.
Is the work performed by the worker critical, necessary, or central to the potential employer’s principal business? If yes, this indicates employee status.
If the work performed by the worker is not essential to the company’s purpose and success, this indicates independent contractor status. This factor does not test whether the worker is an integral part of the business, but rather whether the work they perform is an integral part of the business.
6. Skill and initiative.
Does the worker use their specialized skills and business planning to support or grow a business? If yes, this may indicate independent contractor status.
Does the worker rely on the employer to provide training for the job? If yes, that worker is more likely to be classified as an employee.
However, both employees and independent contractors can be skilled, so the fact that a worker is skilled does not indicate a worker’s status. This factor primarily examines whether the worker uses their skills in connection with a business initiative. If yes, that worker will likely be classified as an independent contractor.
Additional relevant factors may be considered and may help assess whether the worker is an employee or an independent contractor.
Impact on Construction Companies
The construction companies rely on subcontractors. When assessing whether a construction worker is an employee or an independent contractor, it is important to consider all six factors listed above.
Further guidance on each factor can be found on the DOL website.
Have questions about classifying your construction workers under the new DOL rule? Contact a CBIZ professional today for clear guidance and compliance support.
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