The US Department of Labor (DOL) recently adopted new regulations that again change the independent contractor test under the Fair Labor Standards Act.
The new regulations essentially undo Trump administration regulations enacted in 2021.
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New rule stresses economic independence
The DOL test is effective March 11, 2024.
In many respects, it reverts the test to its pre-2021 status.
The 2024 rule stresses that economic dependence is the “ultimate inquiry.”
This means that a worker is an independent contractor if the worker “is, as a matter of economic reality, in business for themself.”
This determination is made by looking at the totality of the circumstances to determine whether the worker is economically dependent on the company, and no one factor is controlling.
The factors include:
- the degree of the hiring entity’s right to control how the work is to be performed;
- the worker’s opportunity for profit or loss depending upon their managerial skill;
- the worker’s investment in equipment or materials required for their task or their employment of others to assist with the work;
- whether the service rendered requires a special skill;
- the degree of permanence of the working relationship; and
- the extent to which the service is rendered is an integral part of the hiring entity’s business.
Most employers do not realize that federal and state employment laws offer differing definitions for separating employees from independent contractors
And the IRS still has a different test.
The practical problem is that most employers will classify workers as independent contractors without considering the differing tests.
If the worker is an independent contractor for tax purposes, it will issue a Form 1099-NEC and ignore the other tests.
Fun Fact: The Internal Revenue Code contains 16 different definitions of employee for differing purposes.
Since the DOL and IRS tests are challenging to apply, most states have adopted the ABC test.
The ABC test is designed to make most workers employees.
This test looks at (A) the degree of control the company exerts over the details of the work being performed, (B) whether the service performed is integral to the company’s business, and (C) whether the worker regularly performs a similar service for other companies.
Churches and ministries will be best served using the ABC test.
Is a worker considered an employee under the ABC test? If so, it’s likely they’ll be classified that way under all employment and tax laws.