Department of Labor Issues Independent Contractor Guidance

businessman choosing freelancer to employee ticking box with red marker

The U.S. Department of Labor today issued guidance to assess whether a worker is properly classified as an independent contractor. The guidance also helps to determine who is an employee under the Fair Labor Standards Act, which determines overtime, unemployment insurance and other obligations. Independent contractors are not covered under the act.

The guidance was issued with no opportunity for notice and comment from the public. NAHB is analyzing the rule to ensure it does not place undue burdens on our members to show that subcontractors that they hire are independent contractors and not employees.

The purpose of the new guidance, according to the DOL, is to educate members and help them comply with the law so that they can clearly determine whether their workers are employees or independent contractors. NAHB plans to urge Congress  to use its oversight authority to ensure DOL hasn’t overstepped its boundaries.

The law permits home builders, remodelers and other businesses the use of independent contractors, provided such workers are not “employees” under existing tax, employee benefit, labor and employment laws.

Employer misclassification occurs when an employer incorrectly defines a worker as an independent contractor rather than an employee.

Responding to mounting evidence that many employers nationwide have classified some of their employees as independent contractors as a cost-savings measure, there has been increased federal and state focus on whether workers are properly designated as independent contractors or if they instead should be considered company employees.

The federal guidance outlines tests commonly used to determine worker status for purposes of unemployment insurance, workers’ compensation, and revenue, or taxation.

NAHB also has a new guide to help you understand the law in your state — and any other state where you may do business. This valuable tool is the latest benefit for NAHB members, who otherwise might need to collect the information on their own or buy $349 CDs to get it all in one place. The state-by-state guide examines the laws that determine whether a worker is an independent contractor or employee.

Download the full guide to keep as a reference.

For more information email David Jaffe at NAHB or call him at 800-368-5242 x8317.


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Comments (10)

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  1. Randy Noel says:

    Need more info on workers comp and independent contractors.

  2. Mike Dupont says:

    I am sure that the independent contractors will be treated as we treat our sub-contractors today, meaning if we use a sub-contractor who does not have their insurance, then we would have to cover them under our policy. I think this is to educate builders of their liability with IRS, etc. if they are classifying employees as independent contractors and issuing them 1099’s to keep from paying other requirements that come along with having direct employees

  3. It appears that builders employing undocumented, primarily Hispanic, workers is where the major area of misclassification is occurring. Undocumented, that is workers in the U.S. illegally, have no (valid) Social Security numbers, or any documentation to provide proof they are authorized to work in the U.S. The game builders play is to employ one legal (or appears to be legal) worker who then employs several illegal workers. They all work by the hour. The legal worker turns in time sheets for himself and all the illegal workers and the builder writes one check to the legal worker who in turn pays the illegals in cash. The builder then avoids payroll and unemployment insurance taxes saving probably 15-20% in payroll taxes and costing the state and federal government billions of dollars per year in revenue. In addition, the “cheating” builders are getting a much higher percentage of the available work because the builders that abide by the labor, tax, and other laws to operate legal businesses, cannot compete. This cheating game is prevalent not only in the building industry, but landscaping, cleaning, Mexican restaurants, and many other industries. The problem has gotten way out of hand because of lack of enforcement for many years, maybe even the last 20 years or longer. My understanding is that law requires all employers to complete an I-9, Employment Eligibility Verification on all new employees before employing them, and at least a Federal Tax ID for all subcontractors before employing them, but apparently this is not done by many, if but a small percentage, of employers these days.

  4. Joe Smith says:

    We currently have 2 independent interior designers who work with us in our office 2 to 3 days a week each mostly on alternating days as well as with their own clients. We 1099 them. We pay them for designs and an hourly when here. We are located in MD.
    Thoughts on this arrangement.


    • Mark Buckley says:

      Hi Joe
      I know you asked David but the answer to your question was contained in the reference material he provided. See below.

      Simply providing a 1099 doesn’t make them independent

      Be careful

      There is no single definition of “Independent contractor” under Maryland law.
      Workplace fraud is the intentional misclassification of employees as independent contractors or through “off-the-books” labor. Employers often engage in workplace fraud in an attempt to circumvent the payment of overtime wages, employment taxes, and workers’ compensation coverage that employers are legally obligated to provide to their employees. ─Annual Report of the Joint Enforcement Task Force on Workplace Fraud (December 2011).
      The Workplace Fraud Act of 2009 requires the different state agencies and divisions that are impacted by workplace fraud to share information when they find or suspect that misclassification has occurred. The act created a new misclassification violation in the construction industry.
      The act adopts the “ABC Test” to identify legitimate independent contractors. The three prongs are: (a) the individual is free from control and direction; (b) the individual is customarily engaged in an independent business of the same nature; and (c) the work is outside the usual course of business of the employer or performed outside of any place of business of the employer.
      Memorandum of Understanding The U.S. Department of Labor (DOL) has initiated a Misclassification Initiative in which it has entered into memorandums of understanding (MOU) with states from coast to coast to coordinate enforcement efforts and share information between the state and federal agencies about non-compliant companies. On Sept. 19, 2011, the DOL’s Wage and Hour Division entered into this agreement with the Maryland Department of Labor, Licensing and Regulation, Division of Unemployment Insurance, and the Maryland Department of Labor, Licensing and Regulation, Division of Labor and Industry. The MOU was renewed on Oct. 17, 2014 and it will expire on Oct.17, 2017. Grant
      In 2014, Maryland was one of 19 states awarded a DOL grant for continued independent contractor misclassification detection and enforcement. Additional Resources*
      Memorandum of Understanding
      Amendment No. 1 to the Memorandum of Understanding

  5. Allen Reed says:

    This rule is so simple to understand. It’s the contractors that are trying to side skirt the law to save money by having there employees go out and get insurance but solely work for them so they can save a bundle by not having to pay 1/2 FICA, unemployment, workers comp etc.. and be low bid.
    If you are actually hiring a sub to do work, before they work for you make sure they own their own business, have other work besides just with you, use their own tools, they advertise, they bid the work and you don’t pay them on an hourly basis, they send you proof of insurance etc.. like when you need a licensed plumber.
    Here is another scenario. You and two other contractors team up on a job to frame a house because you don’t have actual employees and need the help. Guess what the other two contractors are considered employees because only one of you actually has the contract with the owner/general contractor. The law is so simple to understand.

  6. Herschel says:

    Allen You start out by saying the rule is simple and end up saying the law is simple and that is true , so why 10 million dollars. The immigration laws and rules are also simple but much more funds are lost to local, state and federal coffers by lack of enforcement of these laws. Healthcare, welfare, education, crime and thousands of persons hired that are not able to do their job to enforce the immigration laws . FICA, unemployment etc.. is a mere drop in comparison. Our independent contractor problem would be somewhat moot if immigration laws were enforced. As always contractors are trying to survive and 10 Mil is thrown at enforcement money from contractors trying to stay afloat and deal with a labor market they don’t have.

  7. Mark Teplitsky says:

    I would personally love to see the independent contractor system go away, especially in the construction industry. There are a few exceptions, but generally, employing workers who do not have the basic employment benefits that most of America does is not doing anyone any good. It creates a work class of people (mostly immigrants) without workman’s comp, social security, who avoid paying taxes, and develop no loyalty to the company that employs them. All for cheap labor. Doesn’t sound like the American way to me. When these folks evade taxes or get hurt and get dependent on our social systems, who do we think pays for it? The general tax payer. So what good is the cheap labor? Pay now or pay later. America should be a place where all are treated equal under the law. So workers should all get the same benefits. This will create a better trained loyal workforce, more patriotic immigrants, and a stronger construction industry.

  8. I believe that this will be great for independent contractors as this will clear up any gray areas in their contractor-client relationship. Even if they aren’t given enough compensation, it should make up when it comes to their contract fee.

    I also agree with what Mark said. Everyone should pay their taxes – it seems like IRS needs to go after these folks who are not paying taxes.

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