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Understanding the DOL’s Independent Contractor Final Rule—A Three-Part Guide for Accountancy Firms (Part I)

Lewis Bird
Posted by Lewis Bird on May 28, 2024 3:00:00 PM

If your accountancy firm uses outside experts, you risk falling foul of a new Department of Labor (DOL) final rule that may mean your independent contractors (or freelancers) count as employees. Part one of this three-part series explains the new classification system and why accountancy firms are at risk.

The DOL’s independent contractor final rule

The final rule, Effective March 11, 2024, revises the DOL’s guidance on what classifies an employee or independent contractor under the Fair Labor Standards Act (FLSA).

The FLSA was enacted in 1939 to protect workers’ rights. It ensures minimum wage and overtime pay standards and requires employers to record employee time and pay.

The FLSA covers employees but not independent contractors; the final rule updates the definition of which is which.

What happens if an accountancy firm misclassifies an employee as an independent contractor?

Misclassifying employees as independent contractors may put your accountancy firm at risk of the following:

  • Wage law violations, such as failure to pay overtime and minimum wage
  • Criminal penalties and liability for back wages
  • Payment of attorney fees associated with litigation
  • Reputational damage and loss of clients

Two high-profile cases show how expensive punishment can get. In 2015, FedEx created a $228 million fund to resolve a claim by over 2,000 pickup and delivery drivers that they were misclassified as independent contractors. In 2022, Uber entered into a $8.4 million settlement with drivers claiming they were misclassified as contractors.

Why are accountancy firms at risk?

US accountancy is suffering a talent shortage as fewer university students take accounting courses and three-quarters of CPAs are at or near retirement age.

As small and medium-sized accountancy firms struggle to fill staffing positions, they are turning to outside resources for help. This might include engaging an outsourcing firm, using a semi-retired CPA one day a week, or taking on freelancers to cover tax season.

These are all viable options as long as each worker is correctly classified according to FLSA guidelines. And here lies the challenge.

What are the new guidelines?

The DOL stresses that it does not penalize independent contractors, including freelancers, who are truly in business for themselves. Instead, it aims to ensure that employees receive legally entitled wages and protections.

The FLSA requires businesses to carry out an “economic reality test” to classify workers – simply calling a worker a contractor in a service agreement does not suffice.

As the name suggests, the test decides if a worker is economically dependent on a business (an employee) or if they are running their own operation (a contractor).

What does the economic reality test consider?

The test comprises six factors that act as a guide to classifying workers as employees:

  • Opportunity for profit or loss depending on managerial skill
  • Investments by the worker and the potential employer
  • Degree of permanence of the work relationship
  • Nature and degree of control
  • Extent to which the work performed is an integral part of the potential employer’s business
  • Skill and initiative

In contrast to the 2021 guidance that the final rule replaces, no one factor is determinative – the 2021 rule gave greater weight to ‘control’ and ‘opportunity for profit and loss.’

How to apply the test to your accountancy workers

Part Two of this series will explain how to apply each part of the test to your firm’s workers. Part Three will show how using the right outsourcing firm is the easiest way to get extra help without adding staff to your payroll.

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This article is intended to give a layperson’s overview of the Department of Labor’s final rule and should not count as legal advice. For guidance on personal queries, please seek professional counsel.

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Topics: Operational Advisory, Management Advisory


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