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The U.S. Department of Labor\u2019s (DOL\u2019s) test for determining whether a worker should be classified as an independent contractor or an employee for purposes of the federal Fair Labor Standards Act (FLSA) has been revised several times over the past decade. Now, the DOL is implementing a new final rule rescinding the employer-friendly test that was developed under the Trump administration. The new, more employee-friendly rule takes effect March\u00a011,\u00a02024.<\/p>\n
Role of the new final rule<\/strong><\/p>\n Even though the DOL\u2019s final rule isn\u2019t necessarily controlling for courts weighing employment status issues, it\u2019s likely to be considered persuasive authority. Moreover, it\u2019ll guide DOL misclassification audits and enforcement actions.<\/p>\n If you\u2019re found to have misclassified employees as independent contractors, you may owe back pay if employees weren\u2019t paid minimum wage or overtime pay, as well as penalties. You also could end up liable for withheld employee benefits and find yourself subject to various federal and state employment laws that apply based on the number of affected employees.<\/p>\n The rescinded test<\/strong><\/p>\n The Trump administration\u2019s test (known as the 2021 Independent Contractor Rule) focuses primarily on whether, as an \u201ceconomic reality,\u201d workers are dependent on employers for work or are in business for themselves. It examines five factors. And while no single factor is controlling, the 2021 rule identifies two so-called \u201ccore factors\u201d that are deemed most relevant:<\/p>\n If both factors suggest the same classification, it\u2019s substantially likely that classification is\u00a0proper.<\/p>\n The new test<\/strong><\/p>\n The final new rule closely shadows the proposed rule published in October\u00a02022. According to the DOL, it continues the notion that a worker isn\u2019t an independent contractor if, as a matter of economic reality, the individual is economically dependent on the employer for work. The DOL says the rule aligns with both judicial precedent and its own interpretive guidance prior to\u00a02021.<\/p>\n Specifically, the final rule enumerates six factors that will guide DOL analysis of whether a worker is an employee under the\u00a0FLSA:<\/p>\n In contrast to the 2021 rule, all factors will be weighed \u2014 no single factor or set of factors will automatically determine a worker\u2019s status.<\/p>\n The final new rule does make some modifications and clarifications to the proposed rule. For example, it explains that actions that an employer takes solely to comply with specific and applicable federal, state, tribal or local laws or regulations don\u2019t indicate \u201ccontrol\u201d suggestive of employee status. But those that go beyond compliance and instead serve the employer\u2019s own compliance methods, safety, quality control, or contractual or customer service standards may\u00a0do\u00a0so.<\/p>\n The final rule also recognizes that a lack of permanence in a work relationship can sometimes be due to operational characteristics unique or intrinsic to particular businesses or industries and the workers they employ. The relevant question is whether the lack of permanence is due to workers exercising their own independent business initiative, which indicates independent contractor status. On the other hand, the seasonal or temporary nature of work alone doesn\u2019t necessarily indicate independent contractor classification.<\/p>\n The return, and clarification, of the factor related to whether the work is integral to the business also is notable. The 2021 rule includes a noncore factor that asks only whether the work was part of an integrated unit of production. The final new rule focuses on whether the business function the worker performs is an integral part of the business.<\/p>\n For tax purposes<\/strong><\/p>\n In a series of Q&As, the DOL addressed the question: \u201cCan an individual be an employee for FLSA purposes even if he or she is an independent contractor for tax purposes?\u201d The answer is yes.<\/p>\n The DOL explained that the IRS applies its version of the common law control test to analyze if a worker is an employee or independent contractor for tax purposes. While the DOL considers many of the same factors as the IRS, it added that \u201cthe economic reality test for FLSA purposes is based on a specific definition of \u2018employ\u2019 in the FLSA, which provides that employers \u2018employ\u2019 workers if they \u2018suffer or permit\u2019 them to\u00a0work.\u201d<\/p>\n In court cases, this language has been interpreted to be broader than the common law control test. Therefore, some workers who may be classified as contractors for tax purposes may be employees for FLSA purposes because, as a matter of economic reality, they\u2019re economically dependent on the employers for\u00a0work.<\/p>\n Next steps<\/strong><\/p>\n Not surprisingly, the DOL\u2019s final new rule is already facing court challenges. Nonetheless, you should review your work relationships if you use freelancers and other independent contractors and make any appropriate changes. Remember, too, that states can have different tests, some of which are more stringent than the DOL\u2019s final rule. Contact your employment attorney if you have questions about the DOL\u2019s new rule. We can assist with any issues you may have regarding independent contractor status for tax purposes.<\/p>\n \u00a9 2024<\/em><\/p>\n <\/body> The U.S. Department of Labor\u2019s (DOL\u2019s) test for determining whether a worker should be classified as an independent contractor or an employee for purposes of the federal Fair Labor Standards Act (FLSA) has been revised several times over the past decade. Now, the DOL is implementing a new final rule rescinding the employer-friendly test that […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7,59,10],"tags":[8,11,12],"class_list":["post-16866","post","type-post","status-publish","format-standard","hentry","category-articles","category-etra","category-news","tag-articles","tag-news","tag-updates"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/16866","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=16866"}],"version-history":[{"count":1,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/16866\/revisions"}],"predecessor-version":[{"id":16867,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/16866\/revisions\/16867"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=16866"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=16866"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=16866"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n
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