Guide to Understanding Independent Contractor Compliance Regulations

Now more than ever, workers and businesses are turning to freelance or “gig” work because of the freedom and flexibility it can provide. Whether the workers are called independent contractors, gig workers, freelancers, or 1099 workers, workers and businesses alike are taking advantage of the trend. Today and beyond, the question for most businesses is not if they will work with independent contractors but when, in what ways, and how they can stay compliant.

Why compliance needs to be front of mind

Navigating the compliance issues involved in procuring, engaging, paying and supporting these types of workers can be challenging. There is no substitute for an individualized review of your needs and evaluation by competent, experienced counsel of your choosing. 

There are, however, some steps and information you can arm yourself with today. This is extremely important since as we mentioned before, “gig” work is on the rise and showing no signs of slowing down. In fact, not only is "gig" work increasing, it preferred by many workers. Consider this: 

1. Seven in 10 (71%) employees would like more flexibility as to when, and where, they work.

2. One in every six enterprise workers is a gig worker. In many cases, the number is even higher. In about 40% of enterprises, one in four workers is a gig worker. 

3. While 74% of managers agree that effective management of independent contractors is critical to their organization’s success, only 30% are prepared to manage a workforce that will rely more on contractors. 

Guide to Understanding Independent Contractor Compliance Regulations

Get insights into some of the newest regulations and compliance considerations that businesses should consider when engaging and managing relationships with independent contractors.

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How do you classify your workers?

Differentiating between W-2 employees and independent contractors can be a challenge. There is a lot to consider, from the agreements you make to the time period in which the person works for you. We have compiled a list that helps outline what you should consider when making a decision on how to classify a worker. 

Other important updates on independent contractor compliance

• What is the 2024 federal update?

  • The U.S. Department of Labor (DOL) has published a final rule that will change the test for determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA). The federal standard has changed several times in recent years, as the different administrations each offer their interpretation on the definition of employee and independent contractor under the FLSA. This final rule takes effect March 11, 2024.  

• Electronic filing regulations

  • Beginning with 2024 filings (i.e., tax year 2023), businesses who file 10 or more information returns will need to file those returns (including Forms 1099-NEC) electronically. Previously, only organizations filing more than 250 information returns in a calendar year had to file their returns electronically. However, new Internal Revenue Service (IRS) regulations issued in February 2023 drastically expanded that mandate. 

• Understanding wage garnishments

  • All states use the federal Income Withholding for Support order (IWO) as directed by the federal Office of Child Support Enforcement (OCSE) to collect child support. The OCSE leaves no room for interpretation as to whether these orders apply to independent contractors. Per the OCSE: “If you receive an IWO for a nonemployee, and you make payments to that person, you must withhold child support from those payments."

• What’s going on at state levels?

  • California has been a hotbed of activity related to employee and independent contractor status and has been the focus of national attention. In 2018 California enacted AB 5, a law establishing a new strict “ABC test” to identify workers as employees or independent contractors. AB 5 created a presumption that workers are employees, but also included several exemptions. In 2020, California enacted AB 2257 which exempted additional industries and occupations from the strict ABC test. Currently, approximately 100 occupations are exempt from AB 5. 

  • New York passed legislation that requires in-state businesses to enter into written agreements with their independent contractors (or freelancers) who provide at least $800 in services rendered. This will go into effect May 20, 2024.

Get the full guide now!

If you thought the above was helpful, and you are looking to dive deeper into anyone (or all) of these areas – we can help. Our full guide dives deep into each area and provides key take-a-ways for you and your business. With compliance impacts being a leading concern when engaging with independent contractors, don’t be left blindsided.