Untangling Worker Classification: Contractor or Employee?

The US Department of Labor (DOL) introduced a final ruling this past March that reshaped the Fair Labor Standards Act (FLSA) classification criteria. This rule reverses parts of the 2021 guidelines, reintroducing a more balanced, multifactor approach to assessing worker status. For accounting professionals advising clients on classification issues, staying current with the latest guidelines is essential to minimizing misclassification risks and avoiding costly penalties.  

Register for our free webinar on November 7, 1:00 PM ET to learn more about the DOL ruling.

In July 2024, the Department of Labor fined C&G HVAC more than $1.5M in back wages after an investigation found that they had misclassified 430 HVAC workers as independent contractors rather than employees. This is just one costly example of why worker classification is vital to business compliance and why accounting professionals and business advisors must stay current on regulations.

Key Changes in the 2024 DOL Rule 

The 2024 rule reverts to a six-factor economic realities test, with each factor treated as equally important. This change rescinds the 2021 “core factor” emphasis on control and profit/loss, requiring businesses to assess each classification factor thoroughly. 

The Six-Factor Economic Realities Test 

Each of the six factors must now be considered when determining worker status, requiring a comprehensive review that documents how each factor applies to the work relationship. The factors include: 

1. Opportunity for Profit or Loss – Determines whether the worker’s earnings are influenced by managerial skill, suggesting independence. 

1. Investments by the Worker and Employer – Evaluates the balance of investments, such as tools and resources, in the work arrangement. 

1. Permanency of the Relationship – Examines whether the work is ongoing or project-specific, a key indicator of classification. 

1. Nature and Degree of Control – Assesses the level of control the employer exercises over the worker’s tasks and schedule. 

1. Extent of Integration into the Business – Determines if the role is integral to the company’s core operations. 

1. Skill and Initiative Required – Considers whether the work requires specialized skills or entrepreneurial initiative. 

Unlike the 2021 rule, which emphasized control and profit/loss as primary indicators, the 2024 DOL rule treats each factor as equally important. This approach requires a holistic review, encouraging accounting professionals to carefully document each factor in their classification analysis. 

Compliance-related control: A critical clarification 

One significant update in the 2024 rule pertains to control exercised solely for compliance with regulatory or legal standards. The DOL clarifies that employer control aimed at meeting legal obligations does not inherently indicate employee status. For example, if a business sets specific safety protocols for contractors in compliance with regulatory requirements, this form of control alone doesn’t establish an employer-employee relationship. 

This clarification is particularly relevant for regulated industries and provides a safeguard for businesses that need to enforce compliance measures without impacting worker classification.  

Best practices for accounting professionals advising on worker classification 

1. Conduct Regular Classification Audits: Set up routine audits (annual or semiannual) of all worker classifications to align with the DOL’s latest standards. This proactive approach helps identify and address any potential misclassification risks early. 

1. Enhance Documentation: Comprehensive documentation is crucial. Record specific details for each factor of the economic realities test, especially for roles that are complex or ambiguous. This will serve as valuable evidence if a classification decision is ever questioned. 

1. Define Roles and Boundaries Clearly: For independent contractors, ensure contracts clearly outline the nature of the work, investment in resources, and degree of control. Establish boundaries around control and clarify any compliance-related requirements separately from operational oversight. 

1. Stay Updated on Regulatory Changes: As worker classification laws continue to evolve, accounting professionals should remain informed about new DOL guidelines and legal precedents. This knowledge is essential for making informed decisions and advising clients effectively.  

Stay informed to ensure client compliance 

As the DOL's 2024 rule introduces a more comprehensive approach to worker classification, accounting professionals are in a pivotal position to guide clients through these updated standards. By familiarizing yourself with the six-factor economic realities test and taking proactive steps—such as regular audits, clear documentation, and staying informed—you can help clients confidently navigate classification and mitigate potential compliance risks.  

Join our free webinar to get the full details

To better understand the 2024 DOL worker classification rule, we’re hosting a free webinar, Untangling Worker Classification: Contractor or Employee? This session, specifically designed for accounting professionals, will cover the six-factor economic realities test in detail, discuss implications for compliance, and share actionable steps to help you guide your clients effectively. 

Register for free to secure your spot and earn CPE credit: 

Date: November 7, 2024 
Time: 1:00 PM ET 

You'll gain practical insights into the latest DOL guidelines and equip yourself with the tools to confidently navigate classification decisions. 

This webinar offers an essential update for accounting professionals, with a chance to earn CPE credit. Don’t miss this opportunity to enhance your expertise and help your clients stay compliant under the 2024 DOL rule.