October 7, 2020
Over the past few years, there has been a renewed focus by the IRS and Department of Labor (DOL) on worker classification. Atlanta employers have the option of classifying a worker as either an employee or an independent contractor depending on a number of factors. While a background detail to those working for the company, in either capacity, there are tax ramifications for the business depending on classification. When an individual is classified as an employee, a business is required to pay the employer’s share of FICA and Medicare taxes, meet minimum wage requirements, pay federal and state unemployment and provide retirement and other benefits. When a worker is classified as an independent contractor the above-mentioned costs are eliminated. To ensure proper classification, the DOL recently issued a new proposed rule that provides additional clarity on this issue. The rule adopts a new economic reality test designed to determine, among other things, whether a worker is economically dependent on a company or in business for themselves. To help clients, prospects, and others, Wilson Lewis has provided a summary of key points below.
Nature and Degree of the Individual’s Control Over Work
This is the first factor in the economic reality test and identifies which party, the worker, or the employer, has substantial control over work performance. For example, when a worker has control over schedule setting, choosing assignments, working with little to no supervision, and the ability to work for other companies they would likely be classified as independent contractors. However, when an employer has control over key aspects of work including the requirement of an exclusive working relationship then an employee classification is appropriate.
Opportunity for Profit & Loss
This is the second factor in the economic reality test and identifies whether a worker can realize a profit or loss based on services provided. In cases where a worker has a risk of loss due to expense liabilities (other workers, equipment, etc.) they would be classified as an independent contractor. Conversely, those who are at risk of possibly not receiving payment could be common to both contractors and employees. The proposed rule cites specific case law examples of how this factor has been interpreted in prior court rulings.
There are also three secondary test factors which should be evaluated when determining status, which include:
It is important to note the proposed rule makes it clear the core test factors should be given greater weight in the analysis. The DOL also specifies that actual practice is more relevant in the decision-making process than what is theoretically possible when determining status.
What’s Next?
Since it is a proposed rule there is now a 30-day comment period during which businesses can provide feedback. Typically, the comments collected are evaluated and decisions about additional changes are made prior to the issuance of a final rule.
Contact Us
When the rule is made final Atlanta businesses will need to carefully review worker classification. If there are changes, it is important to consult with a tax advisor as the tax and benefits liabilities are certain to increase. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.