Six Critical Factors for Determining Employment Status
Effective March 11, 2024, Under the Fair Labor Standards Act (FLSA), the US Department of Labor (DOL) has introduced a new regulation that alters the criteria for determining whether a worker is classified as an employee or an independent contractor. This regulation establishes a consistent and transparent framework for assessing workers’ status and to reduce the risks associated with misclassification, which could deprive workers of their rights and protections.
If employers misclassify employees as independent contractors, employers may owe minimum wage and overtime pay or other benefits and protections to which employees are entitled under FSLA.
The new rule replaces the 2021 Independent Contractor Rule, which primarily focused on workers’ control over their work and their opportunity for profit and loss. The new rule evaluates the relationship between the worker and the employer based on six specific factors that indicate the worker’s degree of economic dependence or independence. All factors matter, and no single rule is decisive.
Six Factors to Consider:
- Opportunity for Profit or Loss depending on managerial skill: An assessment determines if workers can make more money or incur losses based on their decisions and skills. Factors considered include whether the worker determines or can meaningfully negotiate the charge or pay for the work provided; whether the worker accepts or declines jobs or chooses the order and time in which the jobs are performed; whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work; and whether the worker makes decisions regarding hiring others, purchasing materials and equipment, and renting space.
- Investments by the Worker and the Employer: The consideration here is whether the worker or the employer makes capital investments. For example, a freelance writer who purchases their computer and software to complete assignments demonstrates investment in their business. Investments by the worker are capital or entrepreneurial, generally support an independent business, and serve a business-like function, such as increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach.
- Degree of Permanence of the Work Relationship: This aspect evaluates the duration and stability of the work arrangement. A graphic designer who works for the same company continuously for several years is likely an employee, while one who takes on short-term projects for various clients may be an independent contractor. Weigh in favor of the worker being an independent contractor when the work relationship is defined in duration, non-exclusive, project-based, or sporadic based on the worker being self-employed and marketing their services or labor to multiple entities.
- Nature and Degree of Control: The criterion examines how much control the employer has over the work and its economic aspects. Employees are typically subject to more control, such as schedules, supervision, pay rate, and work location. In contrast, an independent contractor has more autonomy and can work for others.
- Extent to Which the Work Performed is Integral to the Employer’s Business: This factor evaluates whether the work performed is an indispensable component of the potential employer’s operations. For example, suppose the potential employer could not function without the service performed by the worker. In that case, their service is integral, critical, necessary, or central to the employer’s principal business.
- Skill and Initiative: An evaluation considers whether the worker uses specialized skills and takes initiative. An independent contractor might actively market their services and use their expertise to attract clients who can manage themselves. At the same time, an employee may rely on direction and training from the employer.
Requirements
As a result of the new regulation, we recommend contacting your attorney, updating contract agreements to reflect the new regulation, and implementing a new procedure when hiring an independent contractor. States may have different tests, which can be more stringent than the DOL’s final rule. If you have determined that you want to convert your independent contractor to an employee, please contact us, and we can help facilitate the onboarding process.
At The Hechtman Group LLC, we understand that tax laws and regulatory and IRS requirements for real estate are vastly different from other financial services. Rich in industry experience, our CPAs and accountants can guide you through all the necessary steps while also creating best practice opportunities for long-term growth.
The Hechtman Group LLC specializes in accounting, tax and business consulting services for individuals, small business owners, and entrepreneurs, with expertise in real estate accounting.