Over the past ten years, multiple revisions have been made to the U.S. Department of Labor’s (DOL) standard for deciding whether an individual may be considered an employee vs. an independent contractor according to the federal Fair Labor Standards Act (FLSA). Now, the employer-friendly standard created during the Trump administration is being repealed. The DOL is implementing a new final regulation. On March 11, 2024, the new, more employee-friendly rule will go into force.

The new DOL rule

Although courts considering employment status concerns may not find the DOL’s final rule controlling, it will likely be regarded as persuasive authority. It will also direct DOL’s enforcement operations and misclassification audits.

Suppose it turns out that you misclassified workers as independent contractors. In that case, you can be responsible for penalties and back pay for any time that they were not paid minimum wage or overtime. In addition, you can be held accountable for employee benefits that were withheld and might be governed by different federal and state employment regulations depending on how many employees are impacted.

Independent contractor vs. employee status

The criteria implemented by the Trump administration, A.K.A. the 2021 Independent Contractor Rule, primarily focus on whether or not people are self-employed or dependent on employers for labor as a matter of “economic reality.” It looks at five different things. The 2021 rule further states that although there is no one determining criteria, it considers two “core factors” to be particularly important:

1. The type and extent of the employer’s control over the work
2. The worker’s potential for profit or loss

The classification is likely correct if both factors point in the same direction.

For tax purposes

The DOL responded to a series of Q&As. For example, “Can an individual be an employee for FLSA purposes even if he or she is an independent contractor for tax purposes?” “Yes” is the response.

According to the DOL, the IRS uses a common law control test variant to determine whether a worker is classified as an employee or an independent contractor for tax reasons. The DOL stated that “the economic reality test for FLSA purposes is based on a specific definition of ’employ’ in the FLSA, which provides that employers’ employ’ workers if they ‘suffer or permit’ them to work,” even though it takes many of the same considerations into account as the IRS.

This wording has been read to mean more in court cases than the standard law control test. Because they are financially dependent on their employers for work, specific individuals who may be categorized as contractors for tax purposes may be considered employees under the FLSA. Contact our RRBB advisors if you have any questions. In the meantime, keep an eye out for part two of this two-part blog series.

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