2024 is bringing some serious changes to the gig economy. The news is already full of companies settling multi-mullion dollar misclassification lawsuits and new legislation around benefits for gig workers going into effect and it’s not even half way through the year.
We’re all in on the gig economy, so we recognize how important these changes are for contractors and the companies that employ them. That’s why it’s critical to fully understand the economic realities test its impact on the classification criteria for 1099 workers. Because misclassification serves no one - not the contractors being misclassified nor the companies facing misclassification penalties.
The new Economic Realities Test
The 2021 regulations introduced three points of an economic realities test to classify workers: is the worker in business for themself, does the worker control the nature and degree of their work, and does the worker own the opportunity for profit and loss. Now, starting in March, there are now six rules under the economic realities test:
1. Does the worker control the nature and degree of the work: As a contractor, the worker should be able to control when, where and how the work is completed - as well as decide which projects they accept or decline. So requiring a set schedule or working location for a 1099 contractor may earn you some extra scrutiny.
2. Is the worker expected to provide their own tools, equipment and workspace: The new rules show greater emphasis on who maintains investment in tools, equipment, and facilities. So contractors are expected to provide their own space, equipment and tools to fulfill the work.
3. Does the worker control their opportunity for profit or loss: Gig workers, contractors and freelancers control their earnings. Being able to negotiate their rates, selecting what work to accept, and deciding the time, scale and efficiency for the work they provide as all part of the dynamic nature of their work. Asking a contractor to be exclusive to your company is a red flag for misclassification.
4. Does the work require specific skills: The new laws have clear focus on skills, recognizing that a gig worker often requires specialized expertise to fulfill the work. Since contractors are hired to fulfill specific needs, they wouldn’t be expected to learn new skills on the job.
5. Is the work time or project based: Though the client/contractor relationship can be ongoing, the actual gig and contract work is meant to be short-term and/or project-based. Permalancer relationships are now major misclassification risks.
6. Can the business operate without this work: If the business cannot function without the work done then it is considered an employee responsibility, not a contractors. For example, a restaurant could survive for a day without a host to seat guests, but they could not stay open without any chefs.
As trends continue to shift more gig work we expect to see continued scrutiny on both gig workers and companies to make sure that all stakeholders in the gig economy are positioned to thrive. That’s why is so important than ever to make sure your workers are classified correctly.
Not sure if you have the right classification? GigEasy’s got you covered. Schedule a free call with our experts for a classification audit.
