In layman’s terms, the question is often “Do I W-2 this person or 1099 them?” We as HR professionals have to ask, “Is the individual performing work on behalf of a company really an independent contractor, or an employee? It’s an age-old discussion we’ve had with employers over the years. The real question (to the government) is, “Do I get my payroll taxes upfront, or can I trust this ‘independent contractor’ to pay his income taxes?” Perhaps this is oversimplified, but it is, indeed, the essence of the issue.
In the past, the standard tool to make a determination on Independent Contractor vs Employee was the IRS 20 question test. It, among a number of updates here and there focused more on who controlled the individual’s work – the contracting company or the individual himself. Today in 2024, we have a “final rule” announced by the DOL to help employers make the proper decision under the FLSA.
Let’s recap a few items first – economic dependence of an individual on a Company was an issue in the past and one which we took into consideration when advising clients about whether an individual was an independent contractor or employee. It’s receiving greater weight now and the DOL considers misclassification as a serious issue.
A fair question that we’ve been asked a lot is, “I’ve never had a visit from DOL. Has something new happened to increase that risk?” The short answer is, “Yes”. We discuss specifics as well as what to expect with a DOL audit in the “DOL Why Should We Care” article.
What should you do?
- Make a list of everyone you’re compensating for services performed (every person in your vendor list), including the cleaning staff, maintenance, plumbing, IT.
- Make a list of everyone to whom you’re giving a 1099.
- Cross off the obvious Independent’s, i.e. AT&T, payroll companies that you absolutely know have a number of clients and for whom your payments to them are a drop in the bucket.
- What’s left is a list of your possible IC/Employee issues.
So, what is the final rule?
We are glad you asked! The final rule is designed to reduce confusion, improve compliance, and better protect working people. We have listed the expectations below as summarized by from the DOL themselves so there are no headaches. But of course, if you have any questions, we are available to help you along! Sometimes these new rules can be tricky to implement. You have no worries though, that’s how Executive Advantage can help!
- Restores the multifactor, totality-of-the-circumstances analysis to assess whether a worker is an employee or an independent contractor under the FLSA.
- Ensures that all factors are analyzed without assigning a predetermined weight to a particular factor or set of factors.
- Uses the longstanding interpretation of the economic reality factors. These factors include opportunity for profit or loss depending on managerial skill, investments by the worker and the potential employer, the degree of permanence of the work relationship, the nature and degree of control, the extent to which the work performed is an integral part of the potential employer’s business, and the worker’s skill and initiative.
- Rescinds the 2021 Independent Contractor Rule.
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