The factors that determine if a worker is an employee or an Independent Contractor are changing AGAIN!
On October 13, 2022 the Biden Administration’s Department of Labor has proposed a change from an “economic realities” test that many consider more streamlined to a “totality of circumstances” test. This change would likely result in more workers being classified as employees
The Trump administration’s rule which is currently in effect primarily focuses on two “core factors”:
- The extent of control exercised over key aspects of the work; and
- The opportunity for profit or loss.
The Biden administration wants to replace the use of “core factors” and use a “totality-of-the-circumstances analysis.” The DOL said it would “ensure that all factors are analyzed without assigning a predetermined weight to a particular factor or set of factors.” The six factors set forth in the newly proposed rule are:
- The worker’s opportunity for profit or loss depending on managerial skill;
- The relative amount of investment made by the worker in comparison to investments made by the potential employer (notably, DOL states that worker costs incurred for tools and equipment to perform specific jobs do not count as an investment and “indicate employee status”);
- The permanency of the worker’s relationship with the potential employer (the proposed rule states that a work relationship that is “definite in duration, non-exclusive, project-based, or sporadic” indicates a contractor relationship);
- The nature and degree of the potential employer’s control (the proposed rule states that control exercised by the potential employer for compliance with “legal obligations, safety standards, or contractual or customer service standards” could indicate an employee relationship);
- The extent to which the work performed is an integral part of the potential employer’s business; and
- Whether the worker uses specialized skills indicative of business-like initiative.*
In addition, the proposed rule states that “additional factors” that “may be relevant” should also be considered.
*Source: https://www.fisherphillips.com/news-insights/labor-department-proposes-to-rescind-flexible-independent-contractor-test-and-re-impose-outdated-standard-5-key-questions.html accessed Oct 24, 2022
What the Proposed Rule Is Not
The proposed rule addresses independent-contractor classification under the Fair Labor Standards Act (FLSA) (which addresses hours, wages, overtime, etc,), and not any other statute. Different and typically narrower tests apply for determining employee status under, for instance, the Internal Revenue Code (taxes), National Labor Relations Act (unionization), Title VII (discrimination) and common law (for tort liability and other purposes).
Source https://www.hklaw.com/en/insights/publications/2022/10/us-labor-department-issues-proposed-rule-on-independent-contractors. Accessed Oct 24, 2022
The proposed rule also does not directly affect independent-contractor classification for purposes of state employment laws. For instance, the proposed rule does not directly affect states that have implemented a California-style “ABC” test for classifying workers.
So this means that employers have several sets of guidelines from several government agencies, federal and state, to follow! It is all quite complex!
What does this mean for homeschool groups?
Bottom line is that it is safer and sometimes easier to treat workers-especially teachers and leaders in a homeschool program-as employees. It is not within the means of most homeschool groups to take a stand and fight for their position in court. Large corporations like Lyft and Uber have been doing that, but they have a lot at stake; homeschool programs don’t have the capacity to hire lawyers like a large corporation has.
But i also believe that employee status is the correct classification for teachers in a homeschool program.
My position is that teachers and the leaders in a homeschool program are an integral part of the homeschool organization’s business (factor #5 above) and therefore should be treated as employees. In addition, the homeschool group leaders must and do exert significant control over the teachers (factor #4 above) for the safety of the children and the proper execution of the homeschool program.
Non teachers such as bookkeepers, web designers, custodians may be correctly classified as Independent Contractors if they meet the DoL and IRS guidelines.
I explain my rational in detail in my book Paying Workers in a Homeschool Organization.
Paying Workers in a Homeschool Organization covers paying workers as employees or independent contractors. There are also chapters on paying volunteers and board members. It includes sample forms, tips and advice to help you pay workers in accordance with the IRS laws to help your organization pay their workers correctly. Written specifically for homeschool organizations.
The proposed changes by the DoL only make it harder for homeschool groups to justify paying teachers or leaders as Independent Contractors.
The penalties for worker misclassification can be hefty! It could bankrupt your program!
What should we do now?
1.Start be reading some of my blog posts on worker classification:
Why I think most homeschool teachers should be paid as employees
Parents pay teachers directly in a homeschool group: Is that a good practice?
Paying homeschool co-op leaders
2. Discuss changing your teachers to employees with your board. The start of a new year is a good time to make a switch. If leaders are currently being paid, you have extra issues to face such as a conflict of interest because leaders cannot vote to pay themselves. You likely need for the paid workers to leave the board and replace them with volunteers.
3. Consider a consultation with one of HomeschoolCPA’s Recommended Consultants. They understand homeschool groups and two of the consultants Becky Abrams of HomeschoolLeaders.com and Rebecca Foley of StartAHybridSchool.com pay teachers as employees in their programs and can help you understand the work involved in hiring employees.
This is a very important issue to get right! As I stated earlier the penalties for worker misclassification are severe and worker audits are happening more and more frequently! Avoid the problem by addressing it now.
Carol Topp, CPA
HomeschoolCPA.com
