Your neighbor kid mows your lawn. A guy from church fixes your broken slider door. Can you pay them cash? Probably. How about your full-time nanny? Probably not. Drawing the line between independent contractors (who receive IRS Form 1099 and pay their own taxes) and employees (who receive IRS Form W-2 and for whom withholdings must be made) has never been easy. A new rule issued by the Department of Labor (DOL), which takes effect on March 11, 2024, pushes the line toward employee designation.
DOL oversees enforcement of the Fair Labor Standards Act (FLSA), an expansive piece of legislation that was part of Franklin Delano Roosevelt's New Deal agenda. FLSA established a federal minimum wage as well as overtime requirements for hourly workers. It includes various record-keeping and work-place rules too. FLSA only applies to employees, not to independent contractors. So DOL has long been interested in discouraging (with fines and penalties if necessary) employee misclassification. The Trump administration simplified DOL’s longstanding test for misclassification in 2021. The Biden administration argued the 2021 test deviated from established law and precedent, and on January 10, 2024, the DOL published its new rule.
The rule requires potential employers to balance six different factors derived from federal case law and reflecting “economic realities” before making a final determination of independent contractor or employee. Specifically:
It is important to remember that classification cannot be determined simply as a matter of contract between the parties. Likewise, potential employers should be aware of a large body of existing case law where classifications have already been made. Application of the six-factor test may lead the employer to one conclusion; but that conclusion will be trumped by existing case law that reaches the opposite conclusion on a similar fact pattern. The best bet is a periodic audit with an HR or legal professional to review and determine the classifications in place.