06 Mar Worker Classifications are Changing
W-4s vs. 1099s. Employee vs. contractor. Do you know what your workers are actually supposed to be classified as? There are so many terms that get thrown around but, in the end, your organization is on the line to know what term and what form of payment is needed for each type of worker. Let’s shed some light and bring clarity about how workers should be classified, why it matters, and how it is changing.
Why does it matter how workers are classified?
Worker classifications are all about defining the relationship between an employer and a worker. The IRS looks at the type of services performed by the worker and who controls how and when the work is performed. The vast majority of workers in the US are classified as “employees” and are offered protections under applicable labor laws. Most importantly, they are subject to the Fair Labor Standards Act (FLSA) which guarantees a non-exempt worker must be paid at least minimum wage and one and a half times the minimum wage for any work performed over 40 hours/week. These protections are meant to enable workers to make a living wage and receive certain benefits from employers. Employers are also required to comply with labor laws for their employees.
Independent contractors (also called self-employed or freelancers) are another worker classification. Independent contractors (IC) are defined as being in business for themselves and are not protected by the FLSA. They aren’t considered “employees,” and do not receive employee benefits, including unemployment and employer-paid Social Security and Medicare taxes.
What are the consequences of incorrect classification?
Misclassifying a worker as an “independent contractor” when they should actually be an “employee” can result in employer fines as well as retroactive employer liability for employer taxes, social security and Medicare taxes, and unemployment taxes for the worker as long as they have been in service to the employer.
How do you determine worker classification?
In 2021 the Department of Labor (DOL) issued an Independent Contractor Rule in an effort to help employers correctly classify their workers as employees or independent contractors. It included “Five Economic Reality Factors” where the first two factors were weighted more heavily in determining the worker’s classification:
- Nature and degree of control over the work
- Worker’s opportunity for profit or loss
- Amount of skill required to perform the work
- Degree of permanence of the relationship
- Whether the work is part of an integrated unit of production.
The new DOL rule, finalized in January 2024 and effective March 2024, adds a sixth factor to the Economic reality test: “the worker’s investment in equipment or materials required for their task, or their employment of helpers.” Simply, it looks at whether a worker is purchasing his/her own equipment, like computers, musical instruments, software, lawn equipment, etc., and whether they can hire their own workers to help them perform tasks.
Plus, the DOL no longer weighs the first two factors more heavily but looks at the totality of circumstances in considering correct classification.
How does this impact your organization?
This new rule further narrows the number of workers who can correctly be classified as independent contractors. For churches and non-profits, this means taking a look at current 1099 independent contractors and carefully examining whether or not they should be employees. Many will likely need to be reclassified as employees as soon as possible. Take each through the onboarding process, including reviewing and signing the staff handbook, getting a background check, and filling out all necessary new hire paperwork.
Let’s take a look at an example of each to help as you reexamine your workers:
Employee: A paid regular childcare worker. They do not have control over when and how they perform their work, don’t invest in their own equipment, and work a fairly regular schedule (even if it’s only a few hours per week.) Additionally, childcare is an integral part of church ministry.
Contractor: A graphic designer with his/her own business. A nonprofit hires a graphic designer to put together a rebranding package for them. The graphic designer uses their own computer and software, decides how and when to perform their work as long as a deadline is met, and performs similar services for other clients.
Original content by HR Ministry Solutions. This information is provided with the understanding that Payroll Partners is not rendering legal, human resources, or other professional advice or service. Professional advice on specific issues should be sought from a lawyer, HR consultant or other professional.