HR Legal Updates

How the DOL Contractor Rule Affects Your Small Business

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There’s a big “compliance” deadline looming on the horizon for all businesses surrounding the classification of those who work on/in your business as either employees or contractors.

Now, first of all, something helpful to know about me is I have a big issue with the word “compliance”. It infers control and hierarchy and is all too often misused (covid flashbacks, anyone?) – and this HR Heretic is not here for any of those things. 

AND, I would also be a terrible Business Strategist if I didn’t mention there is in fact some legal risk to your business if you misclassify someone in a wrong category. Even if done unintentionally.

So what is this deadline and what does it have to do with you as a conscious entrepreneur or business leader? Pull up a seat, settle in with your favorite beverage and let’s dig in!

How the DOL employee contractor rule impacts your small business

Department of Labor Issues New Independent Contractor Rule – Effective March 11, 2024

Essentially, the the Department of Labor (DOL – a federal agency) has made it more difficult to classify those who work on/in your business as Contractors vs Employees. Not all is lost, I promise you. Let’s get into the specifics – 

Breakdown of the new DOL Rule

  • Under this new rule, called Employee or Independent Contractor Classification under the Fair Labor Standards Act (FLSA), this federal agency has reinstated a multi-factor test and rescinded the 2-factor test previously approved.
  • Now, the reason this matters is some states simply used to be more strict than others (namely California, New York + Illinois to name a few) – but this new rule is a FEDERAL requirement which means this now affects all of you 😵 So while this ruling doesn’t newly affect the stricter states (they’ve been playing their own game for a while now), the playing field is now pretty even across the board.
    • psst – did you know that in California, the contractor rule is even more strict than the DOL rule? CA considers EVERYONE an employee UNLESS the company can prove EACH of the following items
      • worker is free from control + direction of the business/hiring entity in connection with the performance of the work
      • worker performs work that is outside the usual course of the hiring entity’s business, AND
      • worker is engaged in an independent business of the same nature as the work performed for the hiring entity.
  • Here is the DOL’s multi-factor 6 point weighted test
    • What is the degree in which the potential employer controls the work;
    • What is the Worker’s profit or loss opportunity;
    • What is the Worker’s and potential employer’s investments in equipment and materials;
    • What is the degree of permanence of the work relationship;
    • What is the Worker’s skill level; AND/OR
    • What is the extent to which the work is an integral part of the potential employer’s business.

Why is there a new DOL Rule?

The thought behind Contractor regulations like these is workers need to be protected from employers who would take advantage of the classification + mistreat the relationship to avoid paying benefits costs/payroll costs, not provide required leave of absence protections, receiving cheaper labor etc.

On the other hand, there are many people in this new paradigm who have discovered the joys of Contractor work and love that setup, and would not be thrilled at being forced to be an employee against their will.

And of course, I’d be remiss to neglect there may also be governmental/insurance/pharmaceutical incentives to have more employees on the official payroll record so taxes, premiums and the like can be withdrawn and paid on a regular basis.

What is the Penalty Cost for Misclassification?

How much of a penalty could a small business receive for misclassifying contractors and violating the DOL rule or a stricter State agency contractor rule?

This answer isn’t very cut and dry as it depends on each situation – but bottom line, it will be expensive. The penalty usually includes all back pay owed, including state/federal taxes, any missed overtime payments, any missed break or meal periods penalties, any owed health benefit contributions, any owed benefits such as sick time and vacation time, plus any damages as deemed by the State. 

Depending on the amount of back-pay owed and the length of time of the misclassification, this could be upwards of a multi 5-figure fine or more ☠️

How to Navigate the DOL Contractor Rule

Conscious Stewardship (the Return to Eden approach to “Legal Compliance”) is a very real + key part of a Conscious Business ethos. However, this doesn’t mean you need to begin converting every single one of your contractors to an employee – unless that’s something that feels aligned for your business, of course!

As a conscious founder, entrepreneur or CEO stewarding a Sacred Business, Radical Responsibility is the starting point. Ultimately, as a conscious soul with a sacred business, it is your responsibility to determine how you’d like to move forward knowing this is what’s being required of all businesses at a federal level.

Suggestions for Potential Next Steps

  • It’s crucial you take an honest look at your current team structure + contractor support and review their scope against the test/s detailed above
    • Do you have clear Independent Contractor agreements in place? If not, commit to getting that done as soon as possible. This is to protect your brand and also provide clarity to your Contractor support about their job scope + your expectations.
    • Do you have clear Employee Offer Letters in place? If not, commit to getting these done as soon as possible as well.
  • If you do consider reclassifying a Contractor as an Employee, consider if you’d like to transition the Contractor you’re currently utilizing OR if you’d like to hire a more aligned team member for the role
  • Assess your financials
    • Do you need to adjust the pricing of your products/services in order to accommodate these financial changes?
    • Are there any other areas in your business expenses that are out of alignment that can be removed/adjusted?
  • If your team size is increasing, check to see if any of your legal requirements have changed as well.
    • Are there certain leave options you need to provide to your team?
    • Are you now required to offer certain benefits such as sick leave, 401k, other leaves of absences etc?

Protect Your Sacred Business

If you’re ready to step into Radical Responsibility and full agency over the Conscious Stewardship (aka Legal Compliance) of your Sacred Business, I’ve got your back.

There are absolutely steps you can take to proactively prevent any state or federal labor agency from knocking on your door + investigating your team structure. If you’re ready to take a deep dive into this area of your business, our Conscious Business Strategy Session is the way to go. This coaching call is a great cost-effective way to receive dedicated People Ops/HR support + protect your brand from fines! 

In this 1-hour session, we’ll dive deep into the specifics of this DOL ruling for YOUR sacred business (or any other major People Ops/HR need you want to cover!). We’ll discern your true level of risk with your team structure and put together a clear, strategic action plan aligned to your values, supports your team + protects your sacred business🔥

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Hey, I'm Dominique.
Your Soulful HR Growth Partner.

I believe entrepreneurs are vision holders for creating an authentic and deeply meaningful human experience. I love to partner with creative business leaders who choose to be disruptive in the way they nurture growth for their brand, their team + the greater collective.

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When entrepreneurs are ready to grow, the top question we're asked is "Should I hire an employee or use a contractor for projects?"

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