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Hey everyone, and welcome to another episode of the Hartford Small Biz Ahead Podcast. My name is Gene Marks. Thank you so much for joining me. As I record this and imminently, the Department of Labor is going to be financing worker classification rules that are gonna have a big impact on your business and mine. I talked about this, last spring when initial roles were being introduced, but there’s been some changes and I wanted to make sure that I update you on what’s going on and to make sure that you’re fully aware of what the impact is on your business. Now, when I talk about worker classification roles, what that means is whether or not you classify, an outside contractor, an independent contractor, a freelancer, as an independent person or as an employee of your business. My company uses a lot of freelancers, and I’m sure you do, too.
A lot of businesses do that because when you use a freelancer, you can cut down on all the costs of having an employee. You don’t have to pay payroll taxes and employee benefits and workmans’ compensation and be subject to some of the rules that employers have to follow if they hire an employee. So, there’s a lot of benefits to having a freelance worker or an independent contractor work for your business. But unfortunately, some businesses have abused those rules in the past, and the Department of Labor is looking to sort of clarify a lot of those rules and make it a little bit harder for us to classify some of those independent contractors as independent going forward. Some of these rules are kind of the same. I mean, if you have an independent contractor who’s not an employee, you should have an agreement with that contractor, and it should be, passing certain economic realities tests.
And these are some of the tests that are in these worker classification rules that the Department of Labor is considering. Things like making sure that the worker can set their own hours and use their own tools and hire their own people and are not subject to your minute management as it is. The independent contractor should really be their own standalone business. They shouldn’t be reliant on you for their livelihood. These are all a number of these sort of economic reality factors that are part of the Department of Labor’s new rule that’s coming out. There is one part of the rule that’s actually really significant that will impact all of us. And although it’s not new, it’s gonna be clarified and it’s gonna be paid a lot more attention to by the Department of Labor. And that has to do with whether or not your contractor is an integral part of your business. Now, the Department of Labor gives an example of like a farm for example, that pays workers to grow food and say you’ve got those workers that are part of your, they’re independent contractors…
So they’re not employees of yours. Well, if you’re growing food and the independent contractor’s involved in the growing of the food, they’re doing that farm work, then that independent contractor is performing an integral work for your business and therefore should most likely be classified as an employee. So think about the effects this has on so many other businesses around the country. I mean, say you’re a healthcare company and you have independent contractors going out to provide services for your patients, or you’re an accounting firm, or you’re an architect firm or a marketing firm, and you hire an independent contractor to provide services for your clients. Or say you’re a transportation or a trucking firm and you’ve got an independent truck driver that’s out, doing work, delivering packages to your customers, or you’re in the construction industry and you hire an independent contractor to come in and put up drywall or do work on one of your projects. Or you’re a technology company and you have an independent contractor doing development work.
You see what I mean? These people are doing integral work for your business. So therefore the Department of Labor under these new rules are gonna be saying to you, “Hey, these guys shouldn’t really be independent contractors. They should be your employees,” which means you owe employer taxes and they may be able to participate in your employee benefit plans. And they can unionize if they want to and they have the rights of a worker. So that’s a big deal for a lot of companies. And a lot of attorneys and accountants are trying to figure out what kind of advice to give to their clients. But the fact of the matter is, is that the advice is kind of minimal because it either is or it isn’t. I mean, I know there’s other economic reality tests involved, but yeah, I gotta tell you something.
I mean, like my business, for example, I have some independent contractors that do work for my clients. I bill ’em out to my clients. I think under these new rules, I’m gonna have to be incorporating them as a, or including them as an employee. If you don’t do it, the Department of Labor is probably not gonna find out, unless somebody reports you. And it will probably get reported first to your state’s Department of Labor who are gonna be in compliance with the federal rules. And that’s gonna get you into trouble because say you discontinue work with an independent contractor and they’re like, “Hey, I’m entitled to unemployment insurance.” And then you’re like, “no, you’re an independent contractor. ” And then the employee goes to, or the worker goes to the State Department of Labor and says, “this guy was treating me as an independent contractor and I should have been an employee because I’m owed, unemployment insurance.”
And then the state suddenly becomes aware of you and they start getting involved. Or say a worker, an independent contractor hurts themselves on a project or, or is that your job? And they want to file for worker’s compensation and the state tells them, “sorry, you don’t get that because you’re an independent contractor.” And then the independent contractor turns around and says, “no, no, no, that employer, I was doing a lot of stuff for this person, you know, integral to their business. I should have been classified as an employee.” That opens up a can of worms with the state. You you get what I mean? It’s a big issue. It is a big issue. Now, there’s some things you can do to mitigate this. You can have written contracts, you can centralize one person that makes this determination.
Maybe an attorney or somebody, an HR expert to determine the status of a worker. You might want to use, staffing companies more or professional employer organizations because they worry about the employee, they’re to their employees and you’re basically contracting out or outsourcing with them for your employees. You can require, your independent contractors to make sure they’re incorporated, so that they’re standalone, separate businesses that they own. But honestly, even if you do all of that, any of these agencies, your State Department of Labor, the Federal Department of Labor, can look at your relationship with that contractor, look at the economic realities of your relationship, determine whether that contractor was integral to your business. And if that’s the case, you could find yourself that no matter what the steps that you’ve taken, that contractor really is and should have been classified as an employee.
And you’re gonna be subject to, doing that. And by the way, if you’re willfully ignoring these rules, you also could be subject to potential civil fines as well. I mean, or criminal, depending on the extent of it. So it’s a big issue. So these rules are coming out this year and they’re gonna affect a lot of businesses. A lot of freelancers and independent contractor associations and organizations, they’re not thrilled with this because they wanna be independent. They like that independence. But regardless, these rules are still coming. So if that’s the case and you do use these independent contractors, these 1099 workers, that’s the tax form that you use to report on their services. You gotta revisit them all and determine your relationship with them and the economic realities that you have with them if they’re performing services that are integral to your business.
Basically, if you’re billing ’em out to your customers and your clients, they might very well have to be classified as employees and you’re gonna have to take some steps to make sure that you do that. Bite the bullet. You’re gonna have to be paying a little bit more. That is just what the facts are. My name is Gene Marks. You have been listening to the Small Biz Ahead Podcast. If you would like more tips or advice or help in running your business, please visit us at SmallBizAhead.com or SBA.TheHartford.com. Hope you found these insights and advice helpful to help you run your business. I’m doing this every week. I’ll be back next week with another topic of concern to both you and me and I don’t know what that topic is yet, but there are many on my list. I’ll be discussing them and hopefully offering thoughts that will, help you run your business. Thanks for listening. We’ll see you again next week. Take care.
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