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  • Writer's pictureTom McCally and Edward Krill

Changes to the IRS/DOL Definition of "Independent Contractor"

Effective on March 11, 2024, the definition of independent contractor will change for purposes of entitlement to overtime and payment of employment taxes. 

This new Regulation replaces the Trump Administration’s regulations that limited the factors to be considered and made independent contractor status easier to attain. See 86 FR 1168 The former rule emphasized the contractor’s control over the work and risk of profit or loss: still valid considerations but now part of a broader analysis.

This amended rule modified parts of 29 CFR 780, 788, and 795.

The new Regulations will require examination of several factors, none of which is determinative. The Rule describes the new analysis as a “totality of the circumstances” test.

The information that will be considered in this assessment are these:

  • the worker’s opportunity for profit or loss (whether the compensation set for the work is based on time and cost or is a flat fee for a delivered final product);

  • investment and obligations incurred by the parties (whether the contractor rents the workspace, has invested capital in the work site or equipment, buys materials, provides technology, or employs assistants);

  • the degree of permanence of the relationship (whether the contractor has been doing this work for years in the same manner on a regular basis as the core work of the contractor);

  • the nature and degree of control over the performance of the work (whether the contractor works off-site, without supervision, in a somewhat creative manner with control over schedule and delivers a finished product);

  • the extent to which the work is an integral part of the business (whether the contractor delivers goods or services that are essential and regularly incorporated into the company’s ongoing service, manufacturing, or professional product.

An additional factor is whether the contractor has other clients and the percentage of business devoted to a single company. An exclusive dependency on one source of work without the freedom to accept other responsibilities or the fact that the contractor may do work for others, but elects not to, are now more important criteria than in the past.

The degree of control over the work as it progressed has always been an important factor in determining independent contractor status. This criterion is enhanced by the professional licensure or special accreditation or credentials of the contractor. The skill of the contractor and the complexity of the work are important factors. Information that would support the exemption from overtime of a regular employee based on “professional” status also leads to the conclusion that there is an independent contractor relationship.

In summary, the test for independent contractors has not been fundamentally changed. Making the correct decision between W-2 and 1099 status still requires a careful analysis of the entire relationship.



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