A recently proposed rule posted in the Federal Register by the Department of Labor (DOL) aims to clear some of the murkiness around who is, and who is not, an employee for purposes of the Fair Labor Standards Act (FLSA). The new rule may help business owners and employers avoid payroll tax issues by correctly designating employees versus independent contractors.
For now, the proposed rule is just that--proposed. Interested parties had until October 26, 2020 to submit comments in writing for consideration before the rule was adopted. Ostensibly, the reason for the rule is to “to promote certainty for stakeholders, reduce litigation, and encourage innovation in the economy.”
In the past, the general standard for determining who is a bona fide employee centered on the degree of interdependence between the contractor and the business paying for their services. This took the form of evaluation by “economic reality” rather than services provided.
The proposed rule still makes use of the “economic reality” test, and the factors in play are very similar to the old measure. However, greater weight is given to “core factors” identified under the rule. Also, other definitions have been slightly retooled.
Here are some key points of the new rule:
- More weight is given to core factors that include the degree of control an individual exercises over their work, and their opportunity for profit or loss. A “gig” worker who determines their own schedule and plans and chooses their own work opportunities would be more likely to be seen as an independent contractor. A worker who has opportunities to increase their profits through innovation by their own initiative would also fall on the contractor side of the equation.
- Other important factors address the level of skill required to perform a job. If the service is specialized, a worker may, in the right circumstances, be considered a contractor as opposed to an employee who is provided training in order to obtain skills.
- Job permanence and work that is part of an “integrated unit of production” weighs on the choice between vendor and worker. Employment for a defined period of time or project is less permanent than a full-time hire. Whether an employee is in the workplace, such as a factory, or providing service beyond company walls on behalf of the company has important bearing as well.
Why is this rule important?
The difference between an employee and an independent contractor is found in benefits like insurance, safety standards, and the legal obligations of an employer to an employee. Oftentimes, employers create payroll tax issues for themselves when they declare workers to be independent contractors or falsify their employment roll.
The rule revises some definitions that could be overruled by state law or by a court down the line. For now, the proposed rule offers an inside look at new standards employers might use to solve the somewhat sticky problem around classifying their workers as employees or contractors.
Experienced legal representation if you are dealing with tax litigation
With offices in Chicago and Cleveland, the tax lawyers at Robert J. Fedor, Esq., LLC offer informed guidance if you are dealing with employment tax disputes, a civil tax audit, or a criminal tax charge. Call us at 800-579-0997 or contact us online when you need a skilled tax attorney you can count on.
