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American Payroll Association Notes Concerns With Labor Department’s Proposed Worker Classification Rule

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

The American Payroll Association (APA) has shared its comments to the U.S. Department of Labor regarding concerns to its proposed worker classification rule that have to do with conflicting definitions of the term employee at the federal, state and local levels.

Proposed rule.

On October 11, 2022, the U.S. Department of Labor (DOL) announced the publication of a proposed rule to revise the Department ’s guidance on how to determine who is an employee or independent contractor under the Fair Labor Standards Act (FLSA).

The proposed rule would rescind an earlier rule on this topic that focuses on a two part “economic realities test” and replace it with an analysis for determining employee or independent contractor status that is more consistent with the FLSA as interpreted by longstanding judicial precedent.

The DOL said its proposed rule is not using “core factors” but instead aims to return to a totality-of-the circumstances analysis of the economic reality test in which the factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity.

More than 55,000 comments.

The DOL received more than 55,000 comments on its proposed independent contractor rule as the comment period closed on December 13, 2022. The proposed rule faces opposition, particularly from the gig industry, technology sector, and small businesses. Many note that the proposed rule does not acknowledge the changing landscape of work.

A common refrain in the comments of support noted that worker classification occurs most commonly in low-wage occupations where misclassification is common such as delivery services, janitorial services, agriculture, transportation, and home care and housekeeping, as well as gig work.

APA’s concerns.

The APA’s primary concern is about the conflicting definitions of an employee and of an independent contractor that exist at the federal level. Specifically, the APA is concerned with the conflicting definitions of employee and independent contractor between the proposed rule by the DOL’s Wage and Hour Division (WHD) and the common law definition used by the IRS.

The current definitions and the different tests used to determine whether a worker is an employee or an independent contractor can result indifferent answers, so the APA asked the WHD to better align the FLSA definition of an independent contractor with the IRS.

The APA is also concerned with conflicting definitions between the federal government and state and local jurisdictions. The APA explains that it is possible for the same worker to be classified as an employee at the federal level and an independent contractor at the state level.

DOL/IRS employment tax referral.

On December 14, 2022, the DOL and IRS signed a Memorandum of Understanding (MOU) for employment tax referrals related to worker misclassification. Under the MOU, the DOL and the IRS agree to collaborate and share information to aid employment tax compliance. While the DOL and the IRS use different factors to determine a worker’s status, the DOL’s Wage and Hour Division (WHD) agrees to refer worker classification cases to the IRS’s Small Business/Self Employed Specialty Employment Tax (SB/SE) that meet certain criteria.


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