Understanding The DOL's Independent Contractor Final Rule

In the final article of this three-part series, we explain why using an outsourcing partner can help accountancy firms avoid penalties for misclassifying workers.

The new Department of Labor (DOL) guidance on differentiating employees and independent contractors makes life much more complex for accountancy firms, as outlined in Part One and Part Two of this series.

Under the new rules, that "independent" CPA you take on every tax season might count as an employee. The same goes for the part-time accountant who helps you with day-to-day operations.

To avoid penalties for misclassifying workers, you have two choices: add new staff to the payroll or seek a truly independent contractor. The first is expensive and time-consuming, and the second requires a worker to pass the DOL's 'economic reality test' to prove they are a business in their own right.

Below, we explain why engaging the right outsourcing company is your fastest and cheapest route to solution two.

What do we mean by 'outsourcing'?

'Outsourcing' means getting third-party help with your business operations. Technically, this could be from an individual, but this article will discuss outsourcing firms with multiple staff.

How to choose an outsourcing partner that will pass the economic reality test

To recap: The DOL's economic reality test is a six-factor framework businesses can use to establish whether their workers are contractors or employees.

The factors have equal weighting and are considered together to inform a verdict on a worker's classification.

You can learn more about each factor in Part Two of our series. This article also explains why outsourcing firms pass the test with ease.

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

To be classified as an independent contractor, a firm that offers outsourcing for accountants must negotiate their own fees, decide whether to accept a job, advertise their services, and make decisions to hire staff or rent space.

Case study: SKS is an outsourcing firm that offers outsourcing services for accountants. We agree on fees with our clients during an initial consultation, choose who we work with, and employ over 900 staff (including a marketing department). Under this factor, we count as an independent contractor.

Factor two: Investments by the Worker and the Potential Employer

The second factor of the economic reality test looks at who pays for tools like office space and technology. If a worker invests money to increase their ability to do more or different work, they are likely a contractor.

SKS case study: Our staff operates from company-owned offices globally. We use proprietary technology and pay for accountancy software ourselves. We do not, for example, use our clients' Xero or FreshBooks licenses. Therefore, we count as independent contractors.

Factor three: Degree of permanence of the work relationship

A worker may be considered an independent contractor if the relationship with their client has a set duration, is non-exclusive, project-based, or sporadic.

SKS case study: A client might hire SKS for a definite period, such as one year or a month. We run as a business in our own right, serving thousands of clients worldwide. Under this factor, we count as an independent contractor.

Factor four: Nature and degree of control

If a business sets a worker's schedule, supervises them, and bans them from working for competitors, that worker is an employee.

SKS case study: We return work to clients within a set timeframe; however, we control which team members complete the work and when. We are accountable for staff performance and have multiple clients.

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

If the work performed by a worker is critical, necessary, or central to your accountancy firm's principal business, this factor indicates that the worker is an employee.

SKS case study: If this factor were examined alone, we might count as employees. However, the final verdict on employee classification considers all factors as a totality of circumstances. In the balance, we count as independent contractors.

Factor six: Skill and initiative

If a worker does not use specialized skills or is dependent on training from your accountancy firm, they are likely an employee.

SKS case study: we hire and train our own staff. We have a highly skilled team of specialists who work with multiple clients. Under this factor, we count as an independent contractor.

The only quick way to avoid misclassifying employees

Taking on extra help is becoming an increasingly risky area for accountancy firms. As our case study shows, working with an outsourcing partner helps accountancy firms side-step the danger of misclassifying workers as employees.

You can learn more about the other benefits of outsourcing here.

Disclaimers

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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