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Employee or Independent Contractor? There’s New Rules Again

Posted by Concannon Miller on Thu, Apr 1, 2021

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Employee or Independent Contractor? There’s New Rules AgainThe U.S. Department of Labor has recently taken action on the criteria for determining independent contractor status, rescinding regulations that were enacted as recently as two weeks prior to President Biden's inauguration in the last days of the Trump administration. That means what's old is new — the regulations in force now are left over from previous administrations.

However, the DOL is taking public comments on its action until April 12. It's possible that the agency may fine-tune the old-is-new regulations in the future.

Independent Contractor Status

In the case of the independent contractor regulations, employers may be required to reclassify gig workers as employees. This change would give affected workers all the financial benefits and Fair Labor Standards Act protections enjoyed by regular employees.

The legal bar for supporting independent contractor status at the federal level has ebbed and flowed over the years, while some states have laid down their own standards. For example, President Biden has spoken favorably of California's standards. Under California law, independent contractor status must be justified by the presence of all three of these conditions, known as the ABC test:

  • A: The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact,
  • B: The worker performs work that's outside the usual course of the hiring entity's business, and
  • C: The worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.

The underlying problem at the federal level is that the FLSA defines "employee" but not "independent contractor." That leaves the job of defining "independent contractor" to regulators, whose boss — the President of the United States — changes every four or eight years.

"Economic reality" was the key phrase in the Trump Administration's DOL regulations that defined independent contractor status. That approach essentially gave maximum weight to two of several additional criteria previously used:

  • The nature and degree of the worker's control over the work, and
  • The worker's opportunity for profit and loss based on initiative and/or investment.

The rescinded Trump-era rule also stated that "the actual practice of the parties involved is more important than what may be practically or theoretically possible." For example, if workers had the ability to negotiate their terms of work in the way an independent person might do, but never took advantage of that opportunity, the worker's mere ability to conduct such negotiations wouldn't support an argument that the worker should be treated as an independent contractor.

READ MORE: Business Owners: How to Avoid IRS Penalties for Using Independent Contractors

A Need for Change

The DOL explained its decision to rescind the Trump administration's change in the independent contractor status criteria this way: "Courts and the [DOL] have not used this [economic reality] test, and the FLSA does not support it." It also stated that the Trump administration's regulation "would minimize other factors courts have traditionally considered, making the economic test less likely to establish that a worker is an employee."

So, for now at least, additional worker status determination variables that had been subordinated are now to be given more weight, as they were prior to changes made during the Trump administration. A key criterion is the degree of permanence of the working relationship between a worker and the potential employer.

The IRS also has a stake in the employment status determination due to its role in collecting payroll taxes. "There is no magic or set number of factors that 'makes' the worker an employee or independent contractor, and no one factor stands alone in making this determination…. Factors which are relevant in one situation may not be relevant in another," the IRS states on its website.

If you think any workers you're treating as independent contractors might be deemed employees, now is a good time to take a fresh look at the situation.

Definition of "Joint Employer"

The U.S. Department of Labor has rescinded Trump-era regulations on "joint employer" status. This action increases the odds that large companies that use franchisees to distribute their products and services might find themselves in the hot seat. Revisions to the now-dropped joint employer regulations took effect March 16, 2020. They make it harder for a company that uses franchisees to be deemed to share the role and responsibilities associated with employing people who, for all practical purposes, are employed by the franchisee.

Joint employer status, under the rescinded regulations, was deemed to exist only if the potential joint employer:

  • Hired or fired the employees,
  • Supervised and established the terms of the employees' employment, and
  • Maintained employee records of the employees.

Those regulations came under fire in the federal court system. In 2020, the U.S. District Court for the Southern District of New York shot down significant portions of rules, asserting in part that the DOL's interpretation of the FLSA and previous court rules on the issue was "arbitrary and capricious" and violated a federal law called the Administrative Procedures Act. The DOL cited that ruling in rescinding the revised joint employer regulations.

"Rescinding these rules would strengthen protections for workers," stated the DOL. For franchisees, the practical effect could be greater scrutiny of their labor practices by their franchisors.

For More Information

Worker classification is a complex issue that varies based on the situation. Recent changes to the DOL regs warrant a review of how you're currently classifying workers to determine whether you'll need to add more workers to your payroll. This could result in higher salaries, wages and benefits costs for 2021. Contact us and your HR advisors about how to classify workers for tax and regulatory purposes.

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Topics: Business consulting

Concannon Miller’s unique, holistic and intimate approach to financial health sets us apart from smaller CPA firms with more limited resources as well as mega firms where mid-sized clients struggle for attention. Contact us here to talk about improving your business.

This communication is designed to provide accurate and authoritative information in regard to the subject matter covered at the time it was published. However, the general information herein is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purposes of avoiding tax penalties.

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