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 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.
Misclassifying employees as independent contractors may put your accountancy firm at risk of the following:
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.
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.
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).
The test comprises six factors that act as a guide to classifying workers as employees:
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.’
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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