Tax Alert: New DOL Guidance on Employee or Independent Contractor Classification

3/20/2024 - By Glenn Scharf, CPA

Are they Employees or Independent Contractors?

This is a classification question that I am asked frequently. Fortunately, recent guidance from the Department of Labor (DOL) can give us all some clarity. On January 10, 2024, the DOL published a final rule on employee or independent contractor classification under the Fair Labor Standards Act (FLSA). This rescinded an earlier rule and replaced it with a step-by-step process called the Economic Reality Test. This process gives us a clear, concise, and simple way to help determine the status of an individual. This final rule and new analysis process should also reduce the risk of misclassification, as it is more consistent with prior interpretations of the FLSA.

Why is this such a big deal?

Employees have certain rights that independent contractors don’t have. Some examples include workers compensation protection, overtime protection, unemployment benefits, payroll taxes, and, if you have over 50 employees, minimum health insurance requirements. Misclassifying someone could be very costly. If you classify someone as a contract and they indeed are an employee, the employer will be responsible for back taxes, penalties and interest… and the penalties are very steep.

Read the DOL’s article on employees and independent contractors here.

If you have any questions or need assistance determining your workforce status, contact our Client Accounting & Advisory Services Team.

About the Author | Glenn Scharf, CPA

Glenn is a shareholder at Saltmarsh, Cleaveland & Gund and leads the firm's Client Accounting & Advisory Services. Glenn leverages technology and modern accounting processes to help his clients improve data quality and access meaningful analytics to improve financial performance. He and his accounting team are equipped to assist clients with management of their back-office accounting needs, including full outsourcing, automating internal accounting and CFO services. Glenn also leads a national CAAS roundtable group representing accounting firms from across the U.S. through our affiliation with the BDO Alliance USA. Prior to joining Saltmarsh in 2003, Glenn worked for several large, international firms upon graduating from the University of Florida. He has extensive experience in the areas of accounting, process engineering and tax management and is viewed as a trusted resource for many family-owned businesses, individuals, and industries, including manufacturing, technology, real estate, telecommunications, e-commerce and healthcare.