Understanding the DOL’s Independent Contractor Final Rule—Determining Your Accountancy Worker’s Employment Status (Part II)

We introduced the economic reality test in article one of our three-part guide to the Department of Labor’s final rule on independent contractor status.

This is a six-factor framework that accountancy firms can use to establish whether their workers are contractors or employees.

Below, we explain each factor in detail and provide examples of its application. For full details, we recommend visiting the DOL website.

Factor one: opportunity for profit or loss depending on managerial skill

In short: does your worker make management decisions that will impact their profit and loss?

Workers are likely to be contractors if they can negotiate their rates for a project, accept or decline work, and hire their own team members if needed.

Note that asking for a pay rise or agreeing to work overtime does not count as a managerial skill in this case.

Example of likely employee status

An accountancy firm gives Bob, a CPA, regular assignments. He does not independently choose projects, seek work at other accountancy firms, or advertise his services. Bob regularly agrees to work additional hours at a fixed rate.

Example of likely contractor status

Anna runs an outsourcing firm that provides accountancy services. She publicly advertises her business, negotiates contracts, decides which jobs to perform and when, and hires a team of bookkeeping and tax specialists.

Factor two: investments by the worker and the potential employer

In short: does a worker spend money to further your business or their own?

If workers invest money to increase their ability to do more or different work and reduce costs, they are likely to be contractors.

The amount of money does not matter: If a worker is making similar investments (even in smaller amounts) as an employer, which allows them to operate independently, they are still likely a contractor.

Example of likely employee status

Rohan helps your accountancy firm with bookkeeping, preparing financial statements, and managing client payroll. He works in your office and uses your computer and software.

Example of likely contractor status

James completes special projects for your accountancy firm. He uses his own computer and software and has his own office. He advertises his services and invests in marketing to find new clients.

Factor three: degree of permanence of the work relationship

In short, is the working relationship continuous, exclusive of work for other employers, and indefinite?

If so, that would suggest a worker is an employee. On the other hand, independent contractors are more likely to have work relationships that are non-exclusive, project-based, or sporadic (though they may still be indefinite).

Beware! A seasonal or temporary worker is not automatically classed as an independent contractor. The FSLA may indeed view the workers you take on around tax season as employees.

Example of likely employee status

Sarah, an accountant, helps out in your office one day a week. You decide which projects to give her and she does not work for any other accountancy firms.

Example of likely contractor status

Amanda specializes in tax advice for the hospitality industry. She markets her services publicly and works for multiple companies. You can call on her sporadically for help, but sometimes, she is too busy with other clients.

Factor four: nature and degree of control

In short: does the worker have control over aspects of their work, such as which projects to choose, their schedule, fees, whether they can work for others, and if they are supervised? Note that a business asking workers to comply with certain laws or regulations does not count as ‘control.’

Example of likely employee status

Christina, a CPA, provides regular services for your firm. You ask her for her input regarding schedule and assignments, but you have the final say. Her contract with you prevents her from working for competitors. You let her get on with tasks but check in every month for a performance review.

Example of likely contractor status

You found Robert, a CPA, through his website and agreed to his fees. He steps in to help your clients with tax advice and does the same for other accountancy firms. You do not tell him on which days or times he has to work.

Factor five: the extent to which the work performed is an integral part of the potential employer's business

In short: Is the job done by a worker critical, necessary, or central to a business?

Example of likely employee status

Your accountancy firm pays a CPA to help its clients with year-end reporting. As this is a necessary part of accounting, the CPA is integral to your company’s business.

Example of likely contractor status

Your accountancy firm hires a social media specialist to promote a new office location. Their marketing support is not central to the principal business of your practice (accountancy).

Factor six: skill and initiative

In short, does a worker leverage their specialized skills to generate new business and obtain work from multiple companies?

Both employees and contractors can have specialized skills, but if they use those skills to promote their own business or bid for new work, they are likely independent contractors.

If a worker is dependent on training from a business, they are likely an employee.

Example of likely employee status

Sameera is a CPA specializing in the charity sector. You allocate her work and timetable according to your clients' needs. You sometimes send her on courses to update her knowledge of charity regulation.

Example of likely contractor status

Maya is a highly skilled forensic accountant who helps out at your firm. She markets her skills to multiple businesses to generate new work. Although she is a specialist, she uses and markets those skills to advance her own business.

Consolidating your findings

Under the economic reality test, no single factor determines a worker’s status as an employee or an independent contractor. Instead, it is considered according to the ‘totality of the circumstances,’ a legal term that means decisions are based on all available information rather than one hard rule.

For example, if you use an accountancy outsourcing firm, it will, of course, perform tasks that are integral to your business. However, if the other five factors are taken into consideration, it would still count as an independent contractor.

What’s next

In the third and final part of our series, we will show how choosing the right outsourcing firm can protect you from misclassifying workers.

Disclaimer

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 personalized guidance, please seek professional counsel.

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