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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 2024, the Biden administration issued a final rule that may impact the use of subcontractors, a practice that is widely used in residential construction.

Prior to this rule, the U.S. Department of Labor (DOL) under the Trump administration published a rule that focused on two of five total factors used to determine worker status. This latest rulemaking, which goes into effect on March 11, 2024, considers the following six non-weighted factors:

1. Is the work performed an integral part of the employer’s business?
2. Does the worker’s managerial skill affect the worker’s opportunity for profit or less?
3. Is the relationship between the worker and employer permanent or indefinite?
4. What is the nature and degree of the employer’s control?
5. Does the worker use specialized skills to perform the work, and do those skills contribute to business-like initiative?
6. Are investments by a worker capital or entrepreneurial in nature?

According to the rule, DOL will also consider additional factors that “may be relevant in determining whether the worker is an employee or independent contractor” to be considered in the question of worker status, but DOL did not provide examples of what those factors could be.

NAHB submitted comments when the Biden-era rulemaking was first proposed, noting that the new policy threatens to impact many industries that rely on the subcontractor business model. Given the unique nature of every contractor-subcontractor relationship at any time on a residential construction project, these changes will likely result in inconsistency and less predictability in the determination process.

NAHB opposes any legislative or regulatory effort that would restrict the ability of subcontractors to qualify as independent contractors. While this rulemaking does not affect the Internal Revenue Service (IRS) test for determining work status, 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 DOL, IRS and state guidelines on independent contractor determination.

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