The U.S. Department of Labor (DOL) announced on Jan. 9, 2024, the issuance of its final rule regarding whether a worker is an employee or an independent contractor under the federal Fair Labor Standards Act (FLSA). The new rule, which becomes effective March 11, 2024, rescinds the 2021 independent contractor rule issued under former President Donald Trump and replaces it with a six-factor test as outlined below. Additional factors may be relevant if they depend on whether the worker is economically dependent on the potential employer for work.

IMPORTANT: The rule does not adopt an “ABC” test and does not impact independent contractor classification under state laws utilizing the “ABC” test, such as California, Massachusetts, New Jersey, and others. The rule only revises the DOL’s guidance on how to analyze who is an employee or independent contractor under the FLSA. 

The DOL believes this new rule will provide greater clarity and consistency for businesses. However, it could potentially lead to an influx of litigation against certain businesses, particularly in the transportation and logistics industries, by attorneys seeking to have independent contractors reclassified as employees and awarded damages for overtime and deductions from pay, even if those workers prefer to be independent contractors.

The following is an overview of relevant factors associated with each of the new six-factor tests: 

1.    Opportunity for Profit or Loss Depending on Managerial Skill:

  • Whether the worker determines or can meaningfully negotiate the charge or pay for the work provided,
  • Whether the worker accepts or declines jobs or chooses the order and/or time in which the jobs are performed,
  • Whether the worker engages in marketing, advertising, or other efforts to expand their business or secure more work,
  • Whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space,
  • If a worker has no opportunity for a profit or loss, then this factor suggests that the worker is an employee. 

2.    Investment by the Worker and the Employer – This factor considers whether any investments by a worker are capital or entrepreneurial in nature. Costs to a worker of tools and equipment to perform a specific job, costs of workers’ labor, and costs that the potential employer imposes unilaterally on the worker are not evidence of capital or entrepreneurial investment and indicate employee status. Investments that are capital or entrepreneurial in nature and thus indicate independent contractor status generally support an independent business and serve a business-like function, such as increasing the worker’s ability to do different types of or more work, reducing costs, or extending market reach. Additionally, the worker’s investments should be considered on a relative basis to the potential employer’s investments in its overall business. The worker’s investments do not have to be equal to the potential employer’s investments and should not be compared only in terms of the dollar values of investments or the sizes of the worker and the potential employer. Instead, the focus should be on comparing the investments to determine whether the worker is making similar types of investments as the potential employer (even if on a smaller scale) to suggest that the worker is operating independently, which would indicate independent contractor status.

3.    Degree of Permanence of the Work Relationship – This factor weighs in favor of the worker being an employee when the work relationship is indefinite in duration, continuous, or exclusive of work for other employers. This factor weighs in favor of the worker being an independent contractor when the work relationship is definite in duration, non-exclusive, project-based, or sporadic based on the worker being in business for themself and marketing their services or labor to multiple entities. This may include regularly occurring fixed periods of work, although the seasonal or temporary nature of work by itself would not necessarily indicate independent contractor classification. Where a lack of permanence is due to operational characteristics that are unique or intrinsic to particular businesses or industries and the workers they employ, this factor is not necessarily indicative of independent contractor status unless the worker is exercising their own independent business initiative.

4.    Nature and Degree of Control – This factor considers the potential employer’s control, including reserved control, over the performance of the work and the economic aspects of the working relationship. Facts relevant to the potential employer’s control over the worker include whether the potential employer sets the worker’s schedule, supervises the performance of the work, or explicitly limits the worker’s ability to work for others.

5.    Extent to Which the Work Performed Is an Integral Part of the Employer’s Business – This factor considers whether the work performed is an integral part of the potential employer’s business. This factor does not depend on whether any individual worker in particular an integral part of the business is, but rather whether the function they perform is an integral part of the business. This factor weighs in favor of the worker being an employee when the work they perform is critical, necessary, or central to the potential employer’s principal business. This factor weighs in favor of the worker being an independent contractor when the work they perform is not critical, necessary, or central to the potential employer’s principal business.

6.    Skill and Initiative – This factor considers whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative. This factor indicates employee status where the worker does not use specialized skills in performing the work or where the worker is dependent on training from the potential employer to perform the work. Where the worker brings specialized skills to the work relationship, this fact is not itself indicative of independent contractor status because both employees and independent contractors may be skilled workers. It is the worker’s use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor. 

NOTE: The Department of Labor (DOL) and the Internal Revenue Service (IRS) use different criteria for determining whether a worker is an employee or independent contractor, and the criteria serve different purposes.

The DOLs criteria are primarily used for determining eligibility for wage and hourly protections under the Fair Labor Standards Act (FLSA), while the IRS’s 20-factor control test is used for tax purposes.

If you have additional questions, please contact this office for additional information and assistance.

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Initial ERC Claim Disallowance Letters Issued

The IRS has taken a proactive stance by sending out disallowance letters to more than 20,000 businesses. These letters target claims made by businesses that either did not exist or lacked paid employees during the eligibility period (March 13, 2020, to December 31, 2021). This preemptive measure aims to identify ineligible claims before they are paid.

Dubious TV Promotions and Claim Withdrawal Process

A prior warning was issued on September 29th, cautioning business owners against aggressive TV marketing related to ERC claims. Subsequently, a November 9th article outlined a procedure for those who made ineligible claims to withdraw them and avoid potential issues with the IRS. The disallowance letters play a crucial role in preventing incorrect refunds from going to ERC promoters.

How These Letters Help Taxpayers

The disallowance letters serve a dual purpose:

  1. Help ineligible taxpayers avoid audits, repayment, penalties, and interest.
  2. Protect taxpayers by preventing incorrect refunds from reaching ERC promoters.

Enforcement Activities and Future Plans

These disallowance letters are part of the IRS’s broader enforcement activities, with plans for additional letters in the future. The IRS continues to caution taxpayers against aggressive maneuvers by marketers and scammers in the ERC space. However, those engaged in fraudulent activities may face potential criminal investigation and prosecution.

New Voluntary Disclosure Program

Additionally, the IRS launched a new Voluntary Disclosure Program on December 21st, 2023. The new disclosure program allows taxpayers who received ERC but did not qualify to repay only 80% of the credit they received without interest or penalties. Taxpayers must apply by March 22, 2024 to enter the program. To qualify for this program, the taxpayer must provide the IRS with names, addresses, and telephone numbers for the advisors who assisted with the ERC claims. If a taxpayer is unable to repay the 80% of the credit, they may be able to apply for an installment agreement however the taxpayer would be required to pay penalties and interest under the installment agreement.

In the ever-evolving landscape of business regulations, the Corporate Transparency Act (CTA), passed as part of the National Defense Authorization Act for Fiscal Year 2021, introduces new reporting requirements for businesses in the United States, specifically focusing on beneficial ownership.

The CTA aims to combat illicit activities such as money laundering, tax fraud, and terrorism financing by increasing transparency in the ownership structures of companies. It requires corporations, limited liability companies (LLCs), and similar entities to report their beneficial owners to the Financial Crimes Enforcement Network (FinCEN).

What Is FinCEN? – The Financial Crimes Enforcement Network (FinCEN) is a bureau of the U.S. Department of the Treasury. Established in 1990, FinCEN’s primary role is to safeguard the financial system from illicit use, combat money laundering, and promote national security through the collection, analysis, and dissemination of financial intelligence.

FinCEN works closely with law enforcement agencies, intelligence agencies, financial institutions, and regulatory entities. It implements and enforces compliance with certain parts of the Bank Secrecy Act, including the requirement for financial institutions to report suspicious activities that might signify money laundering, tax evasion, or other financial crimes.

FinCEN also plays a crucial role in fighting terrorism by tracking and cutting off sources of funding for terrorist activities. It achieves this by analyzing financial transactions and sharing this information with domestic and international partners.

Companies Required to Report Beneficial Ownership Information (BOI) to FinCEN

There are two types of reporting companies:
Domestic reporting companies – corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States. This includes single member LLCs.
Foreign reporting companies – entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with a secretary of state or any similar office.

There are 23 types of entities that are exempt from the reporting requirements. See FinCEN Q&A C.2. Carefully review the qualifying criteria before concluding that your company is exempt.

Who is a Beneficial Owner – A beneficial owner, as defined by the CTA, is an individual who exercises substantial control over a company or owns or controls at least 25% of the ownership interests of that company. There can be multiple beneficial owners for a single company. The CTA excludes certain entities from this requirement, such as publicly traded companies, banks, credit unions, and certain regulated entities, among others.

The information to be reported includes each beneficial owner’s full legal name, date of birth, current residential or business street address, and a unique identifying number from an acceptable identification document, such as a passport or driver’s license. This information must be updated within a year of any change in beneficial ownership.
Non-compliance with the CTA can result in hefty fines and potential imprisonment. Therefore, it is crucial for businesses to understand their obligations under this new law and take the necessary steps to comply.

The CTA represents a significant shift in U.S. corporate law, and its impact will be far-reaching. While it aims to enhance corporate transparency and combat illicit activities, it also imposes new administrative burdens on small and medium-sized businesses.

Companies will need to devote resources to identify their beneficial owners, collect the required information, and report it to FinCEN. They will also need to ensure that this information is kept up to date, which could require ongoing monitoring and reporting efforts.

Moreover, the CTA raises privacy concerns. Although FinCEN is required to keep the reported information confidential, it can be disclosed in certain circumstances, such as in response to a request from law enforcement agencies.

Filing Due Dates

Existing Businesses -If your company already exists as of January 1, 2024, it must file its initial BOI report by January 1, 2025, which provides plenty of time to comply. But it is best not to procrastinate and risk penalties for not complying.

New Businesses – For a U.S. business newly created on or after January 1, 2024 and before January 1, 2025, as well as a foreign entity that becomes a foreign reporting company in that time frame, the BOI report is due 90 calendar days from the earlier of the date on which the business receives actual notice that its creation has become effective or the date on which a secretary of state or similar office first provides public notice that the company has been created or registered. The reporting deadline is reduced to 30 days for both U.S. and foreign entities created or registered on or after January 1, 2025.

In addition to information about the company and beneficial owners, these businesses must also report information about the “company applicant,” defined as(1)the individual who directly files the document that creates, or first registers, the reporting company and (2) the individual that is primarily responsible for directing or controlling the filing of the relevant document.

Penalties – If a person has reason to believe that a report filed with FinCEN contains inaccurate information and voluntarily submits a report correcting the information within 90 days of the deadline for the original report, then the CTA creates a safe harbor from penalty. However, should a person willfully fail to report complete or updated beneficial ownership information to FinCEN as required under the Reporting Rule, FinCEN will determine the appropriate enforcement response in consideration of its published enforcement factors. The willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required BOI report may be held accountable for that failure. So, this reporting requirement should not be taken lightly.

Updates – When the information an individual or reporting company reported to FinCEN changes, or when the individual or reporting company discovers that reported information is inaccurate, the individual or reporting company must update or correct the reported information, as applicable.

FinCEN Small Entity Compliance Guide – This 50-page guide includes interactive flowcharts, checklists, and other aids to help determine whether a company needs to file a BOI report with FinCEN, and if so, how to comply with the reporting requirements. This Guide will be updated periodically with new or revised information.

How Does a Company File a BOI Report? If your company is required to file a BOI report, you must do so electronically through FinCEN’s online secure filing system.

FinCEN will publish instructions and other technical guidance on how to complete the BOI report form.

Navigating the complexities of the CTA and its reporting requirements can be challenging. If you need assistance, contact your legal counsel.