Independent Contractor Status
With roughly 80% of home builders and specialty trade contractor firms being self-employed independent contractors, they are an essential part of the residential construction industry. But unclear definitions on classifying independent contractors under the Fair Labor Standards Act (FSLA) not only translate to regulatory burdens for businesses and higher costs for homeowners, but they also jeopardize these home builders’ operations.
In January 2021, the Trump administration issued a final rule that provided employers—including home builders and specialty trade contractors—with certainty in determining whether a worker is an independent contractor or an employee under the FLSA. Prior to this rule, both the Department of Labor (DOL) and the Supreme Court considered seven economic reality factors as the best method for determining independent contractor status. Instead, the new independent contractor determination process relied on two core factors:
- The nature and degree of control over the work;
- The worker’s opportunity for profit or loss.
According to the rule, if those core factors did not determine the work relationship, three additional guidepost factors would be considered:
- The amount of specialized training or skill required for the work that the potential employer does not provide;
- The degree of permanence of the working relationship, focusing on the continuity and duration of the relationship and weighing toward independent contractor status if the relationship is definite in duration or sporadic; and
- Whether the work performed is part of an integrated unit of production.
NAHB opposes any legislative or regulatory effort that would restrict the ability of subcontractors to qualify as independent contractors. Specifically, NAHB opposes any efforts to repeal Sec. 530 of the Revenue Act of 1978, which provides relief to employers who utilize independent contractors.
Additionally, any independent contractor reform must provide a clear definition and test for determining an employee’s classification, similar to the Trump-era rulemaking, and consistency among the U.S. Department of Labor, Internal Revenue Service and state guidelines on independent contractor determination.
Shortly after coming into office, the Biden administration not only delayed the effective date of this new rule, but, on the day before it went into effect, withdrew the Trump-era rule, leading to confusion about the requirements businesses must follow to determine worker status. NAHB submitted comments opposing the withdrawal and believes the final independent contractor rule represented a positive step forward that would provide more clarity for employers.
However, in March 2022, a U.S. District Court held the 2021 rule for determining independent contractor status was unlawfully removed, delivering a victory for businesses. The court held that the final rule went into effect on March 8, 2021 – the original effective date – and remains in effect today.
- DOL Employee Misclassification Webpage
- WHD Fact Sheet #13: Employment Relationship Under the Fair Labor Standards Act (FLSA)
- WHD Fact Sheet #13: Employment Relationship Under the Fair Labor Standards Act (FLSA) (Spanish)
- DOL Myths About Misclassification
- IRS: Independent Contractor or Employee?
- DOL Know Your Rights Video: Misclassification as Independent Contractor