The Department of Labor (DOL) recently issued final worker classification regulations (RIN 1235-AA43), that adopt the 2022 proposed regulations with some modifications.
The final regulations were issued by the DOL for purposes of applying the Fair Labor Standards Act (FLSA) and do not apply for purposes of determining whether a worker is an employee or independent contractor for federal income tax purposes. The IRS has issued specific guidance for purposes of determining a worker’s classification for federal income tax purposes, including (but not limited to) IRS Revenue Ruling 87-41, which provides 20 factors that generally should be considered in classifying a particular worker.
In contrast, the new final DOL worker classification regulations contain six factors that generally should be considered. As stated in the final DOL rules, this determination focuses on the economic realities of the relationship between the worker and potential employer and whether the worker is either economically dependent on the potential employer for work or in business for themselves. To determine economic dependence, a totality-of-the-circumstances analysis generally must be conducted by using the six factors to assess the economic realities of the working relationship.
The six factors are:
- Opportunity for profit or loss depending on managerial skill
- Investments by the worker and the potential employer
- Degree of permanence of the work relationship
- Nature and degree of control
- Extent to which the work performed is an integral part of the potential employer's business
- Skill and initiative
The final regulations also indicate that the DOL may consider additional factors under certain circumstances.
These final DOL regulations rescind and replace the prior worker classification regulations issued in January 2021. The DOL indicated that the new final regulations are more consistent with existing judicial precedent and the DOL’s longstanding guidance prior to the 2021 regulations.
These new final DOL regulations may make it more difficult than under the 2021 regulations to classify certain workers as independent contractors (instead of employees subject to the FLSA rules).
Although these final DOL regulations do not apply for federal income tax purposes, taxpayers should anticipate commentary and challenges to the new DOL rules that could lead to future tax implications.
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