We have numerous blog posts on the difference between a) employees and b) independent contractors based on the IRS, Department of Labor (DoL) and State authorities at the time the post was released. However, in January 2024, the DoL released new rules (or go back to the previous rules pre-Trump) on “… how to analyze who is an employee or independent contractor under the Fair Labor Standards Act (FLSA)“. These new rules were in effect in March 2024.
If you are wondering if your business is subject to FLSA rules, then, you have to comply if:
- Your business has $500,000 or more in revenues / sales, or
- Your business is engaged in interstate commerce ( note that interstate commerce is broadly interpreted by Courts on this matter)
The new rules replaced the previous rule from 2021 under Trump, which was considered more business friendly (based on a Reuters article, employees can be up to 30% more costly than independent contractors) as it was easier to classify workers as independent contractors.
The six-factor test are based on:
- Opportunity for profit or loss depending on managerial skill – there should be uncertainty of profit or loss for the business as independent to the employer. Also, the possibility to expand operations (not work for only one employer), negotiate agreements, hire employees, perform marketing / advertising to increase the book of business, etc.
- Investments by the worker and the potential employer – usually a employee uses the tools, equipment and workplace of the employer
- Degree of permanence of the work relationship – short or temporary based on project might indicate independent worker, while long term or continuous might point out to a employee relationship
- Nature and degree of control – in an employee relationship, the employer controls the time (i.e 9am to 5pm), how the work should be performed, provides feedback or comments, etc. In an independent contractor relationship, it is focused on the outcome or product (not the control of the process)
- Extent to which the work performed is an integral part of the potential employer’s business; and – this relates if the services of the workers is related to the nature of the client or not. Example: if the client is a restaurant and I am providing painting services, I am probably an independent contractor. However, if in the same scenario, I am a cook working three days a week there, then, I might be considered an employee
- Skill and initiative – the independent contractor has training and skills outside the client and also runs the business to grow and be profitable
Note that all these factors should be considered to take a decision if it is a employee relationship or independent contractor one. As a result, there is room for
We are aware of several lawsuits, plus lobbying from the U.S. Chamber of Commerce and other organizations. We are unsure at this point if additional changes could happen after the results of the Presidential election. Trump and his team might consider bringing it back to the previous rules when he was President in his first mandate. Our advice discuss with your CPA or tax professional and if the classification is unclear, a consultation with a Labor attorney might be necessary.
Link Reuters – Can US independent contractor rule survive legal challenges, Congress?
