A Growing Crackdown: The Slow Shift in Worker Classification Laws

two lawyers discussing changes in worker classification laws

The misclassification of workers, specifically the wrongful categorization of employees as independent contractors (ICs), has ignited a global firestorm. With the rise of the gig economy, workers and governments alike stand to lose millions in social contributions, casting a spotlight on this contentious issue.

Governments worldwide are stepping up their efforts to enforce labor laws with unprecedented vigor. The first half of 2024 has witnessed seismic shifts in worker classification regulations across various countries. These waves of change are fundamentally altering how companies engage with ICs.

In this blog post, we recap the pivotal events in Q1 and Q2 of 2024 that are driving these monumental legislative changes. We also examine their far-reaching implications for international businesses.

Australia cracks down on ‘sham contracting’

In Australia, the misclassification of workers, often referred to as “sham contracting,” is under intense scrutiny. The explosion of gig-worker apps has underscored the urgent need for regulatory clarity and worker protection.

Responding to this crisis, the new Labor government introduced the Fair Work Legislation Amendment Bill, aimed at closing exploitative loopholes.

The Australian Taxation Office (ATO) issued Draft Taxation Ruling TR 2022/D3 and Draft Practical Compliance Guideline PCG 2022/D5. This offers a definitive stance on the definition of ’employee’ for tax purposes. Companies operating in Australia must now reevaluate the entire worker-hiring entity relationship.

The potential penalties for non-compliance are severe, including hefty fines and increased tax burdens. These developments are sending a clear message that the regulatory environment is tightening in Australia.

The United States campaigns against worker misclassification

In the United States, the campaign against worker misclassification has intensified dramatically. Significant actions have been taken recently by both the Internal Revenue Service (IRS) and the U.S. Department of Labor (DOL).

The IRS has declared a strategic surge in audit activities, particularly targeting:

  • Large corporations with assets of $250 million or more, with the audit rate projected to skyrocket from 8.6% in 2019 to 22.6% by 2026.
  • Partnerships with assets over $10 million, witnessing a tenfold increase in audit rates, from 0.1% in 2019 to 1.0% by 2026.
  • Highly compensated individuals with a positive income of $10 million, with audit rates soaring by 50%, from 0.1% in 2019 to 16.5% by 2026.

These measures, backed by additional funding from the Inflation Reduction Act, aim to correct audit frequency disparities and promote compliance. Employee misclassification is expected to face greater scrutiny with increased audits.

Simultaneously, the DOL has been unrelenting in its enforcement of labor laws to combat worker misclassification. This includes a final rule issued to the Fair Labor Standards Act earlier this year regarding misclassification.

The DOL’s revised “economic realities” test assesses economic dependency, encompassing six factors:

  • The nature of the work
  • Permanence of the relationship
  • Investment in facilities and equipment
  • Opportunities for profit and loss
  • Control by the employer
  • Level of skill and initiative

This new rule escalates the risks for employers, necessitating meticulous evaluation of worker relationships to avoid crippling liabilities.

The DOL’s aggressive recovery of millions in back wages, damages and penalties on an almost daily basis showcases an unwavering commitment to upholding labor rights.

Canada sets a new precedent for worker classification

North of the U.S. border, Canada is embroiled in a landmark class-action lawsuit with the potential to upend worker classification. The case, Heller v. Uber Technologies, challenges the classification of Uber drivers under Ontario’s Employment Standards Act. In March 2024, thousands of drivers received a text from Uber alerting them to the May 24 deadline to opt out of the lawsuit.

However, the ride is not over as the outcome of this case is sending shockwaves through the gig economy. These unfolding developments in employee classification affect not only ridesharing but also other sectors reliant on platform-based talent. This includes hospitality, healthcare, consumer services, professional services and more.

With nearly one million Canadian workers depending on gig-based work as their primary job, this legal battle epitomizes the broader shifts across North America. It has become clear that delineation between independent contractors and employees is under intense scrutiny and redefinition.

Protecting workers and businesses in the global economy

The first half of 2024 has laid the groundwork for sweeping enforcement and legislative changes affecting worker classification. As governments around the world fortify labor laws, businesses must adapt swiftly to avoid the escalating risks of misclassification.

Engaging ICs offers flexibility and specialized skills but poses regulatory challenges. Thorough evaluation, bolstered by an Agency of Record (AOR) service provider, is essential to mitigate these risks. A comprehensive AOR solution, like GoGlobal IC Solutions, ensures proper IC categorization and compliant payment structures.

The recent regulatory changes in Australia, the U.S. and Canada are part of a larger global trend where governments are tightening labor laws and increasing scrutiny on worker classification. An AOR provider with international scalability is crucial for facilitating a seamless engagement process worldwide – regardless of location. The right approach to IC compliance protects both businesses and talent in this dynamic global economy.

Check out the details for GoGlobal IC Solutions or contact us to learn more about how our services can help you safeguard your talent strategy and onboard ICs quickly, compliantly and cost-effectively.