Daniel Moore, CPA, Owner — D.T. Moore and Company, LLC, discusses the recent Department of Labor rule on determining the classification of workers as either employees or independent contractors under the Fair Labor Standards Act. He also highlights the potential legal and financial risks associated with worker misclassification.

The rule, effective on March 11, 2024, aims to align with judicial precedents, reduce misclassification risks and offer more flexibility for businesses engaging with independent contractors.

Factors for worker classification under this rule are:

• Opportunity for profit or loss that a worker might have
• Investments of resources by the worker and potential employer
• Degree of permanence of the work relationship
• Nature and degree of control an employer has over the work
• Extent to which the work is integral to the employer's business
• Skill and initiative of the worker

Dan highlights the importance of considering both IRS and Department of Labor rules when advising clients on worker classification and how to best communicate this change to clients.

 AICPA resources

 

·       Tax season resource center — Access the AICPA's central hub for guidance, tools and developments throughout the tax filing season.

 

·       Employee or independent contractor? DOL issues new guidance, Journal of Accountancy, Jan. 10, 2024

 

Other resources

 

·       RIN 1235-AA43 published in the Federal Register — Department of Labor (DOL) rule

 

Transcript

April Walker: On today's podcast, listen to hear more about a recent Department of Labor rule that talks about independent contractors and employees.

Hello, everyone, and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, lead manager from the Tax Section, and I'm here today with Dan Moore.

Dan is an owner of D. T. Moore and Company in Ohio, and he is another great volunteer friend of mine. And he's been on this podcast before, so welcome back, Dan.

Dan Moore: Thank you.

Walker: Today I thought we could spend a few minutes letting our listeners know about a new rule that the U.S. Department of Labor recently published in January. We're still in January when we're recording this, so very recent. It revises guidance on determining who is an employee and who is an independent contractor under the Fair Labor Standards [Act].

Just to set the stage a little bit, I'm not and Dan's not, an employment attorney, nor do we pretend to be one on TV or on this podcast.

We're going to approach this discussion as CPA tax practitioners and communicating this change to your clients. Because I'm sure you'll know and I'm sure as you're listening, you have clients who have struggled with this issue. It's not a new issue. It's just, it's a hard one to wrap our heads around.

So, we're going to talk a little bit about that. I will provide a link to the rule in the show notes. If you want to read more, it's very long, but we're not going to cover all the aspects and background about that rule. But just a quick little background on it.

In January 2021, the Department of Labor released a rule that was subsequently rescinded. This recent rule that was announced on January the 9th of this year, 2024. It replaces that guidance. It maintains that it's doing is [being] is more consistent with the judicial precedent. The rules that have been challenged in court and how the courts have come down on it. It also will reduce the risk that employees are misclassified as independent contractors, but also more flexibility, for businesses that still do engage with people who are in business for themselves and consider themselves independent contractors.

Let's start with an easy question, Dan. I'm sure it's easy. Maybe it's not easy. What's the definition of an independent contractor?

Moore: Thank you, April. It's always great to do these podcasts with you and I always enjoy the topics that you pick for me.

This one's a little bit challenging because independent contractor — it just depends to me where you're standing in the conversation. And although you can maybe reconcile and come to some conclusion under one aspect of the definition of an independent contractor, say, in the world of tax, when you step over to Department of Labor and you look at the Fair Labor Standards Act, you're standing in a different conversation.

And so, I may have figured it out on the tax side, but now I'm looking at it from the Fair Labor Standards Act. And now I've got to re-reconcile this whole concept as to whether or not someone is an independent contractor.

Independent contractors fall under a bunch of different names. You could call yourself an independent contractor. You could consider yourself to be self-employed. You could be doing freelance work. You could be involved in the much broader gig economy that is very popular and talked about frequently now. The tax aspect is going to be a little bit different about the Fair Labor Standards Act.

And first, before I define an independent contractor to the best of my ability based on the new announcement, I do want to touch on what the Fair Labor Standards Act is.

The Fair Labor Standards Act establishes a minimum wage for employees. It establishes the qualification or the right to pay overtime, record keeping. It discusses child labor law. It covers nursing mothers, 40-hour work weeks, breaks, how tips are to be paid to employees that are in an industry in which they receive tips as part of their compensation, and it prevents retaliation by an employer against an employee. There's a lot of things that the Fair Labor Standard Act covers, and the Fair Labor Standards Act covers employees, but it doesn't cover independent contractors.</p