By Bryan Strickland, for the Journal of Accountancy
A new U.S. Department of Labor (DOL) rule offers guidance for employers related to determining whether to classify a worker as an employee or independent contractor under the Fair Labor Standards Act (FLSA). The DOL said the new regulation (RIN 1235-AA43), published in the Federal Register on Wednesday, returns to an "economic reality test" for determining workers' status under the FLSA.
"Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections," acting Labor secretary Julie Su said in a news release. "This rule will help protect workers, especially those facing the greatest risk of exploitation, by making sure they are classified properly and that they receive the wages they've earned."
Worker misclassification can affect workers' rights to minimum wage and overtime pay and can have tax and withholding consequences.
The rule rescinds the 2021 Independent Contractor Rule that, according to the news release, the DOL "believes is not consistent with the law and longstanding judicial precedent." The new rule becomes effective March 11.
The new economic reality test calls for employers to consider six factors when determining whether a worker should be treated as an employee or independent contractor, without any "predetermined weight" given to any one factor:
- Any opportunity for profit or loss a worker might have;
- The financial stake and nature of any resources a worker has invested in the work;
- The degree of permanence of the work relationship;
- The degree of control an employer has over the person's work;
- Whether the work the person does is essential to the employer's business; and
- A factor regarding the worker's skill and initiative.
The 2021 rule listed five factors of a similar nature but singled out as "core factors" among them "the nature and degree of the worker's control over the work; and the worker's opportunity for profit or loss based on initiative, investment, or both."
When a worker is classified as an employee, the employer must withhold income taxes as well as Social Security and Medicare (FICA) taxes from the employee's paycheck. The worker and the employer each contribute 7.65% of the worker's pay to pay the FICA taxes. When a worker is classified as an independent contractor, the worker is responsible for remitting income tax and for the entire 15.3% FICA tax.
Worker classification also has Federal Unemployment Tax Act (FUTA) tax implications. The regulation's preamble noted that state governments typically receive contributions from employers to help fund programs such as unemployment and disability insurance for the portion of its workforce classified as employees but not for those classified as independent contractors.
In the regulation's preamble, the Wage and Hour Division of the DOL also noted the Census Bureau's Current Population Survey Contingent Worker Supplement data showing that 75.4% of independent contractors have health insurance, compared with 84% of employees.
— To comment on this article or to suggest an idea for another article, contact Bryan Strickland at Bryan.Strickland@aicpa-cima.com.