Factors used to determine independent contractor classification have changed


February 13, 2024

Photo: olm26250 / iStock / Getty Images Plus / Getty Images

Photo: olm26250 / iStock / Getty Images Plus / Getty Images

Employers beware!

On Jan. 10, 2024, the U.S. Department of Labor (DOL) announced a Final Rule that changes determinative factors relating to individuals who provide services and their status as independent contractors.

The rule, which is titled Employee or Independent Contractor Classification Under the Fair Labor Standards Act, goes into effect March 11, 2024. It will use the multifactor analysis used by courts for decades prior to the two-factor rule in effect and published in 2021. The two-factor rule was based on:

  1. The nature and degree of control over the work.
  2. The worker’s opportunity for profit and loss.

Pest management professionals (PMPs) who classify workers as contractors (those who receive a 1099 tax form rather than a W-2 tax form) who get it wrong and have no reasonable basis for doing so, can now be held liable for employment taxes for those workers.

Tax implications

Generally, you must withhold and deposit income taxes, social security taxes and Medicare taxes from the wages paid to an employee. In addition, you must pay the matching employer portion of social security and Medicare taxes, as well as pay unemployment taxes on wages paid to an employee. Companies that use individuals to provide services and treat them as independent contractors do not have to withhold or pay any taxes on payments to those individuals — as long as they can be legally classified as independent contractors.

For this reason, it is much more desirable from a company perspective to classify these workers as independent contractors. However, from the government’s perspective, the misclassification of employees as independent contractors may deny workers minimum wage, overtime pay and other protections.

Classification clarification

Image courtesy of Dan Gordon

Dan Gordon, CPA

According to the DOL, this 2024 rule will reduce the risk that employees are misclassified as independent contractors, while providing a consistent approach for businesses that engage with individuals who are in business for themselves.

This 2024 rule has far-reaching implications. Noncompliance can be expensive in terms of fines and back taxes, so my recommendation is to look at your current list of independent contractors and determine — using the new framework — whether your classification is still valid. If you think your situation is a gray area, I recommend arming yourself with knowledge by contacting a human resources consultant and/or an attorney who specializes in employment matters.

New rule’s 6 standards

The new rule, which comes from the rule prior to 2021, is predicated on the following six factors:

  1. Control over the work. Does the potential employer exercise significant control over the worker’s tasks, schedule and methods?
  2. Investments by the worker and the potential employer. Who owns the necessary equipment and tools? Who bears the costs of business operation?
  3. Degree of permanence of the work relationship. Is the work ongoing or temporary?
  4. Nature and degree of skill and initiative. Does the work require specialized skills and independent decision-making?
  5. Extent to which the work performed is an integral part of the potential employer’s business. Is the worker’s work essential to the core functions of the business?
  6. Integration of the worker into the potential employer’s organizational structure. Is the worker treated like a regular employee, with access to benefits, assigned a company email address, etc.? — DG

About the Author

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Dan Gordon, CPA, owns PCO Bookkeepers & M&A Specialists, an accounting and exit planning firm that caters to pest management professionals throughout the United States. He can be reached at dan@pcobookkeepers.com.

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