Worker Classification 2023 – How to avoid labor violations & stay protected
Labor laws are changing – make sure you’re protected.
Throughout the past year, the U.S. Department of Labor (DOL) and IRS have significantly changed worker classification rules, which has greatly impacted workers’ rights. Changes to the classification process have increased worker misclassification which has negatively impacted both talent and organizations.
In this article, we cover what organizations need to know about the latest worker classification rules and how to ensure compliance when hiring freelance and contract event and marketing professionals.
What is worker classification?
Worker classification is a business legality that defines a worker’s level of involvement in a company. How a worker is categorized impacts wage, benefits, overtime exemptions, and other benefits. The seven common worker classifications are: contract, independent worker, part-time, full-time, temporary, on call, and volunteer.
“Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages. The Department of Labor remains committed to addressing the issue of misclassification.”
- Secretary of Labor Marty Walsh ¹
Proper classification is meticulous and important because, as mentioned above, it decides how a worker is compensated and protected, and misclassification can be very costly for an organization.
Recent changes to worker classification – what you need to know
“We are determined to identify and resolve labor violations by employers who benefit by misclassifying employees as independent contractors and deprive them of the protections of the labor standards laws we enforce.”
– Principal Deputy Wage and Hour Administrator Jessica Looman ²
In October 2022, the U.S. Department of Labor proposed to modify Wage and Hour Division regulations³. The request was to revise its analysis used to determine employee or independent contractor classification under the Fair Labor Standards Act to be more consistent with judicial precedent and the Act’s text and purpose.
In December of 2022, the DOL and IRS renewed a Memorandum of Understanding (MOU)² for employment tax referrals. The agreement added a streamlined process for joint referrals and closer coordination to stop businesses from misclassifying workers and denying them their full wages, benefits and protections under the law.
The updated MOU will also help the department’s Wage and Hour Division share information and work in concert with the IRS to strengthen enforcement of federal and state laws that protect workers’ rights.
The new agreement states, “Collaboration will enable both agencies to leverage existing resources and promote employer compliance with obligations to properly pay employees and to pay employment taxes. This multi-agency approach presents a united compliance front to employers and their representatives.”
While there is no new official rule in place for worker classification, the Biden administration considers the ABC Test⁴ a viable way to determine if a worker is legally classified as an employee or independent contractor. However, this test has made it significantly more difficult for workers to be classified as independent contractors because, as mentioned above, the qualifications differ from state-to-state and can be inconsistent with the IRS’s taxes and reporting regulations.
How do these changes impact your business?
"In some cases, we see upwards of 30%-50% of an organization composed of contingent workers, and organizations increasingly relying on third parties to deliver some of their most essential services."
- MIT Sloan Management Review report⁵
The demand for freelancers and contract workers is rising, as is the interest in being independent.
“84 percent of freelancers are living their preferred lifestyle, as opposed to 54 percent of traditional employees.” - Upwork, Freelance Forward Economist Report
At the same time, the latest changes to classification make hiring independent talent more complex and frustrating for procurement and hiring managers.
The cost of the workers classification changes could be sizeable for businesses. It takes significant time, labor, and budget to ensure worker classification accuracy, and misclassification can result in fines and litigation.
The cost of independent talent rises when workers need to be classified as a W2 because of the contribution to Medicare, FICA, state, local, unemployment, and worker’s compensation expenses. Employers may also need to pay for certain benefits plans depending on the number of hours an employee works.
Increased layoffs due to the recession will put more scrutiny on businesses’ hiring practices. Companies laying off and looking to outsource must be especially careful when hiring independent talent.
BUT, if you do get it right, classifying workers as freelancers is a great solution to “remain nimble and competitive in the face of a fluctuating business environment,” according to the U.S Chamber of Commerce⁶.
Be proactive and compliant.
For organizations, it can feel daunting to worry about compliance, especially when hiring for multiple roles. Here are a few resources to help you with worker classification:
Take the ABC Test to determine if a specific individual or role qualifies.
Take the Soundings Agile Talent Readiness Survey to determine if your organization is equipped to incorporate independent contractors.
Find a partner who can ensure worker classification compliance and pay workers as a 1099 or W2 based on classification.
As worker classification laws continue to change, it’s important to have a resource invested in following and understanding the changing labor laws. The advantage of a partnership with a company like Soundings is forward-thinking protection.
We’ve been monitoring changes to workers’ classification compliance for years and have developed a solution for hiring independent talent that ensures compliance as the rules continue to change. Our recommendations may differ from what staffing companies in the events industry are saying. This is because we are more than a staffing company.
At Soundings, we are focused on protecting organizations and independent talent to ensure all parties can continue to thrive. We work with our customers to design bespoke agile staffing models that ensure access to the talent you need in a compliant and cost-effective manner.
Reap the benefits of working with the freelance workforce without worrying about worker misclassification. We can help you start 2023 off in compliance. Contact us to get started.