Author: Pearson & Co, PC

Déjà vu … All Over Again!

History, Confusion, Efforts to Clarify

Legal and regulatory debates have repeatedly taken center stage at the state and federal levels, the topic … what workers may appropriately be deemed “employees” and which class of workers may be classified as “independent contractors”?

There have been multiple efforts to define the above classifications since the 1938 inception of the Federal Labor Standards Act (FLSA). Disappointingly, the Act does not address the specific definition of either categorization.

A worker’s classification has real world financial consequences for both the individual worker and the company utilizing their services. Independent contractors are not eligible for state or federal minimum wages. Additionally, they are not entitled to overtime pay, workers compensation coverage, unemployment insurance, or benefits. Effectively, independent contractors do not enjoy the protections of state or federal workplace law as do employees.

Employers are often tempted to seek grounds to classify workers as independent contractors rather than employees. Doing so relieves the employer of paying its share of employment taxes … plus avoiding withholding and paying income, Social Security and Medicare taxes. That said, employers are cautioned to be diligent in their research before classifying workers as independent contractors. Misclassifying a worker may subject the business to significant financial penalties.

The latest effort to define employee or independent contractor classification under the FLSA occurred on January 10, 2024. On that date, the U.S. Department of Labor (DOL) published a final rule, effective March 11, 2024, which rescinds the more employer-friendly 2021 test implemented under the Trump Administration.

6 Key Factors to Determine Classification Status

A prudent place for employers to seek guidance is to review how the revised DOL rule restores the premise of equally weighting six factors identified in the rule.

1. Opportunity for profit or loss
2. Investments by the worker and the employer
3. Permanence of the work relationship
4. Nature and degree of control
5. Whether the work performed is integral to the employer’s business
6. Skills and initiative

Checklist Summary

Opportunity for profit or loss: Are profits or losses impacted by the worker exercising initiative or business expertise? For example, can the worker:

• negotiate his/her compensation;
• accept or decline jobs;
• perform like a business, e.g. marketing functions, hiring/firing other workers, purchase materials and equipment?

Investments by the worker and the employer:  Does the worker make investments in his/her business that demonstrates the worker is operating independently?

Permanence of the work relationship: The worker is more likely to be construed to be an independent contractor when similar jobs are:

• provided to a variety of employers;
• project based;
• open-ended in duration.

Nature and degree of control: The following would favor classification as an employee:

• sets own work schedule;
• supervises performance of the work;
• sets billing rates for services;
• authority to discipline other workers;
• freedom restricted to work for others.

Whether the work performed is integral to the employer’s business: Is the work performed a specific necessity for the employer’s principal business?

Skills and initiative: Both employees and independent contractors may demonstrate and perform applying specialized skills. That said, a worker who does not use specialized skills in performing work or requires training from the employer is likely to be classified as an employee.

Employer Action Items

With the above as a guide, an employee is generally considered anyone who performs services under circumstances that the business can control what will be done and how it will be done. What matters is that the business has the right to control the details of how the worker’s services are performed.

In contrast, independent contractors are typically people in an independent trade, business or profession in which they offer their services to the public. Workers often classified as independent contractors include truck drivers, home health workers, auto mechanics, carpenters, plumbers, painters, roofers, drywall installers, among others.

The new DOL rule expands the compliance standards for classifying employees. It makes sense for employers to review existing independent contractor agreements to assure compliance with the new federal requirements as well as state rules and regulations.

The foregoing is meant as an overview only. Click here for FAQs.

For more on how the above applies to your specific circumstances, be sure to give Pearson & Co a call or drop an email. We’ll respond immediately.

Be Sure to Find Out If Your Business is One of Millions to be Affected By the Corporate Transparency Act

Background – Corporate Transparency Act (CTA) 

The Problem: Congress identified a widespread tactic by individuals with malicious intent to affect national security and economic integrity. Specifically, the scheme is to conceal or profit from the ownership of U.S. companies to facilitate illegal operations.

The Solution: The Corporate Transparency Act (CTA) was enacted by Congress in 2021. The purpose of the legislation is to curb unlawful financial activity including tax fraud, money laundering, and terrorism financing. Compliance requires many companies, domestic and foreign, doing business in the United States to report information about the individuals who own or control them.

Under the amended legislation, businesses that meet certain criteria must comply by submitting a Beneficial Ownership Information (BOI) Report to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). The BOI Report identifies individuals who are associated with the reporting company.

“Small Business” Defined 

On November 29, 2023, FinCEN released a final rule to implement the CTA’s reporting requirements. The BOI reporting requirement applies to all domestic and foreign reporting companies categorized as “small businesses”.

Corporations and LLCs are the only business entities referred to in the new rule. FinCen has commented that it believes sole proprietorships and most general partnerships will not have to file a report.

Corporations or LLCs with less than $5 million in gross revenues and/or having 20 or fewer employees are defined as “small businesses” and must file an initial report of changes in ownership with FinCen no later than January 1, 2025. Effective January 1, 2024, any changes in ownership must be reported within 30 days of ownership transfer. Failure to report may result in a fine of $500 per day and/or criminal penalties.

Companies with more than 20 full-time employees and gross annual receipts in excess of $5 million may qualify for an exemption as a “large operating company”.

Who is Considered a Beneficial Owner? 

Under the provisions of the CTA, an individual is deemed to be a beneficial owner if one or more of the following describes the person’s involvement with the reporting company.

• Directly or indirectly have a significant ownership stake in the company;
• Exercises a major influence on the reporting company’s decisions or operations;
• Owns or has control of at least 25% of the company’s shares.

Beneficial Ownership Report Submission Requirements 

Both domestic and foreign companies are required to submit BOI reports. Domestic companies include LLCs and corporations. Foreign companies are those registered to conduct business in the United States.

• Qualifying reporting companies created before January 1, 2024, must submit the Beneficial Ownership Information (BOI) Report no later than the deadline of January 1, 2025.
• Reporting companies registered or established between January 1, 2024, and January 1, 2025, have 90 days from inception to file.
• Businesses established on or after January 1, 2025, will have 30 days from notification or public announcement of their formation to submit their first report to FinCEN.

There is no charge to businesses that submit BOI reports. Electronic filing forms are available on FinCen.gov website.

FinCen has not announced an annual reporting requirement. However, there are requirements to update the original submission when beneficial ownership changes occur. Examples that may trigger an update include beneficial owner changes to:

• Address;
• Name change due to marriage or divorce;
• Obtaining a new driver’s license.

Additionally, changes to a person’s span of authority or duties may be considered events that establish substantial control of a business … and qualify the individual as a beneficial owner.

Note: The reporting timeline for these types of changes may be as short as 30 days. 

FinCen Alert 

FinCEN has been notified of recent fraudulent attempts to solicit information from individuals and entities who may be subject to reporting requirements under the Corporate Transparency Act. The fraudulent correspondence may be titled “Important Compliance Notice” and asks the recipient to click on a URL or to scan a QR code. Those e-mails or letters are fraudulent. FinCEN does not send unsolicited requests. Please do not respond to these fraudulent messages or click on any links or scan any QR codes within them.

Key Takeaway

FinCen is not directly notifying companies to file the above report. If your business is required to report, you must initiate submission of the required forms.

The foregoing is meant as an overview only. There is more to consider. Give us a call and we’ll help you determine your company’s status under the CTA plus help with reporting if necessary.

Research Resources

• Beneficial Ownership Information Reporting | FinCEN.gov
• BOI Informational Brochure (fincen.gov)
• BOI Small Compliance Guide v1.1 (fincen.gov)
• United States Department of the Treasury Financial Crimes Enforcement Network | FinCEN.gov