Demystifying the Employee versus Independent Contractor Rulings

As business owners continue paving the way through 2024, it is important to keep up-to-date with the latest regulations, including a final ruling recently issued by the US Department of Labor (DOL) that changes the guidance on determining how workers are classified under the Fair Labor Standards Act (FLSA).

The FLSA sets the standards for minimum wage, overtime pay, and other employment practices. The new regulations will impact whether businesses classify workers as payroll employees or contractors.

This article sheds light on what business owners need to know about the new guidance and how to ensure your company meets regulatory requirements.

What is the new guidance?

Effective March 11, 2024, the DOL has altered Wage and Hour Division regulations that determine whether a worker is properly classified as an employee or independent contractor.

The first thing to understand is that the new guidance may seem familiar because the DOL is rescinding the 2021 Independent Contractor Rule and replacing it with guidelines that are similar to what was in place prior to March 2021.

According to the DOL and the Journal of Accountancy, the new guidance ensures companies consider six key factors when deciding whether a worker should be classified as an employee or independent contractor, without any “predetermined weight” given to any one factor:

1. Worker’s opportunity to impact profit or loss based on their managerial skill.
2. Extent of the relative investments of the employer and the worker.
3. The skills utilized and initiative demonstrated by the worker.
4. Permanency of the relationship or how long the work arrangement is expected to last.
5. Extent to which the work performed is integral to the employer’s business.
6. Degree of control exercised or retained by the employer.

The DOL states the following to explain the reason for the changes: “. . . we believe [the 2021 Independent Contractor Rule] is out of sync with longstanding judicial precedent and increased the likelihood of misclassification.”

What is the goal of the new guidance?

The new guidance is meant to preserve essential worker rights and ultimately provide clarity and consistency to how employers cover employees versus independent contractors.

“Misclassifying employees as independent contractors is a serious issue that deprives workers of basic rights and protections,” Acting Secretary of Labor Julie Su, said to the press in January. “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.”

By providing specific factors for evaluation, the DOL aims to bring consistency and transparency to worker classification, ensuring that both employers and workers understand their rights and responsibilities.

What is the history leading up to the guidance?

Proponents of the 2021 Independent Contractor Rule which went into effect March 8, 2021, supported the change as a means to both more clearly define as well as simplify the criteria by focusing on two core factors:

• Opportunity for profit and loss
• Nature and degree of control

Critics of the simplified approach argued that it ultimately made it too easy to justify contractor treatment and it was difficult and confusing to evaluate the resulting decisions with the long history of legal precedent that had provided a framework up to that point.

Efforts to rescind the 2021 Independent Contractor Rule have been in progress since 2022, not long after it was put in place. Proposed new rules, comment periods and legal actions occurred in the intervening time period to delay the issuance of the new rule in January 2024.

The new ruling will match the vision of the FLSA when it was first implemented in 1938: “to eliminate labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers,” as cited in the US Code 209.

How can the new guidance impact businesses?

This new guidance first and foremost affects payroll taxes, and it is important for employers to understand the implications to stay compliant.

For workers classified as employees, employers must withhold income taxes as well as Social Security and Medicare (FICA) taxes from said employee’s paycheck. In this way, both the employee and their employer each contribute 7.65% of the gross pay to the Department of the Treasury. On the other hand, an independent contractor is the one responsible for remitting income tax and the entire 15.3% FICA tax.

To the extent the new ruling changes the classification of contract workers to employees, the tax responsibilities for collection and remittance as well as half of the FICA tax expense shift to the employer.

While the Supreme Court has recognized that the Act was “not intended to stamp all persons as employees,” it did see an unmet need to differentiate employees, who fall under the protections of the FLSA, and independent contractors, who do not.

Final Thoughts

It is important that every business has a clearly defined process that is grounded in current guidance from the Department of Labor to evaluate the classification of workers. Of equal importance is the consistent application of the process to your decisions about the workers who help you succeed. If you have any further questions about the new ruling or would like to speak more about the impact on your business, B2B CFO? is here to help. — Get Started With Marc

Need More?

• Planning Your Exit – Maximizing Value And Your Company’s Future
• Understanding the Beneficial Ownership Information Reporting Rule: FAQs For Business Owners
• What is a Good Gross Profit Margin? - Tips to improve GPM and Drive Profitability