On January 10, 2024, the U.S. Department of Labor (DOL) issued a final rule revising its guidance on how to determine whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA). Effective March 11, 2024, this new rule rescinds the prior independent contractor rule from 2021.
The final rule returns to a traditional "economic reality" test that considers the totality of the circumstances using six factors with no single factor being predetermined or given more weight. The six factors are:
- Opportunity for profit or loss based on managerial skill
- Investments by the worker and employer
- Degree of permanence of the work relationship
- Nature and degree of control by the employer
- Whether the work is integral to the employer's business
- The worker's skill and initiative
In contrast, the now rescinded 2021 rule emphasized two "core" factors - control and opportunity for profit/loss.
Key points for CPAs:
- This rule only impacts worker classification under the FLSA for minimum wage and overtime purposes. It does not affect other federal laws like the IRS's common law test for employment taxes.
- However, given the differences from prior DOL guidance, the rule creates compliance risks if workers are misclassified as independent contractors under the FLSA.
- CPAs should review their client workforce, particularly for lower-wage workers providing services integral to the client's business with limited ability to earn profits through managerial skill.
- For high-income clients utilizing household employees like nannies and personal assistants, close analysis under the factors is needed to ensure proper FLSA classification.
- Payroll and tax compliance solutions tailored for household employers can mitigate risks related to worker misclassification for this segment.
The final rule aims to align DOL's guidance with decades of court precedent. However, legal challenges are expected given the rule's significance for businesses utilizing independent contractor models. CPAs should consult with employment counsel to understand their clients' potential exposure.
HomeWork Solutions has specialized in helping CPAs and their clients with household and small business payroll and tax compliance for over 30 years. Contact us for a free phone consultation to find out how we can help your clients stay compliant with the latest DOL rules.