Podcast Summary: ACTEC Trust & Estate Talk

Episode Title: Independent Contractor vs. Employee: In Tax vs. Labor Law
Date: November 5, 2024
Host: Travis Hayes (ACTEC Fellow, Naples, Florida)
Guest Expert: Lee Stoutberg (ACTEC Fellow, Cincinnati, Ohio)

Overview

This episode unpacks the crucial distinctions between independent contractors and employees—clarifying the different standards under tax law (IRS), labor law (FLSA), and ERISA. Host Travis Hayes and guest expert Lee Stoutberg delve into why correct worker classification matters, explore the new Department of Labor Fair Labor Standards Act (FLSA) six-factor test effective as of March 2024, and examine how this compares to IRS and ERISA tests. The episode addresses both the practical and legal ramifications of misclassification, with actionable insights for employers, advisors, and workers.

Key Discussion Points and Insights

1. Importance of Proper Worker Classification

• Impact on Workforce: As of March 2024, 36% of the U.S. workforce are independent contractors. (00:38)
• Risks of Misclassification:
  • Legal and financial consequences for employers if workers are wrongly classified as independent contractors instead of employees. (01:46)
  • Examples include liability for payroll taxes, benefits like 401k and health insurance, compliance with wage laws, and potential lawsuits. (02:11, 02:45)

Quote

"Misclassifying workers can expose employers to class actions and lawsuits ... For example, in 2015, FedEx settled a class action lawsuit for $228 million after the 9th Circuit found ... FedEx had mistakenly classified 2,300 truck drivers as independent contractors."
— Lee Stoutberg, (02:11)

2. Consequences of Misclassification

• FLSA Compliance: Employers must pay minimum wage and overtime unless an exemption applies, currently at $7.25/hour and time-and-a-half for overtime. (01:53–02:07)
• IRS Penalties: Failure to deposit proper payroll taxes leads to penalties (2–10% of unpaid deposit plus interest). (02:36)
• Back Benefits: Employers may owe back benefits like 401k, health insurance, paid time off. (02:45)
• I-9 Documentation: Failing to complete I-9 forms for misclassified workers may lead to civil fines. (02:54–03:07)
• Tax Deductions: Workers may be denied trade or business deductions if misclassified. (03:13)

3. Historical Framework

• Supreme Court Guidance: The 1947 case U.S. v. Silk established the "economic reality" test, evaluating whether workers are economically dependent on the employer based on the nature of work, opportunity for profit/loss, and degree of independence. (03:29–04:11)

4. New FLSA Six-Factor Test (March 2024)

Stoutberg walks through the updated DOL six-factor test that is currently central to FLSA employee/contractor classification. (04:14–05:53)

Breakdown of the Six Factors:

1. Opportunity for Profit or Loss Based on Managerial Skill

   • Looks at the worker’s autonomy—ability to negotiate pay, accept/decline jobs, and choose work order.
   • (04:14–04:30)

2. Investments by Worker and Employer

   • Minor investments by a worker suggest employee status.
   • (04:30–04:35)

3. Degree of Permanence in Work Relationship

   • Continuous/exclusive relationships signal employee status.
   • (04:35–04:41)

4. Nature and Degree of Control

   • Ability to set own schedule, work unsupervised, and work for others points toward contractor status.
   • (04:41–04:59)

5. Integral Part of Employer’s Business

   • If the worker’s tasks are core to the employer’s business, this indicates employee status.
   • Example: Tomato pickers at a farm. (05:03–05:17)

6. Skill and Initiative

   • Workers using specialized, marketable skills for multiple clients may indicate contractor status.
   • Example: A welder working for many clients. (05:33–05:53)

Quote

"A welder who markets specialized skills for multiple customers has a characteristic of an independent contractor."
— Lee Stoutberg, (05:53)

5. IRS and ERISA: Separate But Overlapping Standards

• IRS Test:

  • Traditional "20-factor" control test, reduced to three categories: behavioral control, financial control, and relationship of the parties. (06:01–07:15)

• ERISA Test:

  • Supreme Court's Nationwide v. Darden uses a common law agency test, focusing on control and other relationship factors. (07:15–07:40)

Commonalities & Divergences

• Overlap: All three tests consider opportunity for profit/loss, investment, permanency, integration into the business, and degree of control. (07:45–08:10)
• Key Differences:
  • The FLSA test is broader, aiming for economic dependence.
  • IRS and ERISA rely on common law concepts, with more emphasis on control.
  • FLSA's "suffer or permit to work" standard can encompass more workers as employees than traditional agency tests. (08:14–08:40)

Quote

"The answer ... may have more to do with how the factors are weighed and interpreted than with the factors themselves."
— Lee Stoutberg, (08:19)

6. Practical Guidance for Employers

• Proactive Approach:
  • Employers analyzing FLSA status may choose to treat more workers as employees across the board, even for tax/benefits purposes, to avoid risks of reclassification. (09:02–09:11)

Quote

"Employers proactively looking to properly classify workers for FLSA purposes may voluntarily choose to treat more workers as employees for all purposes."
— Lee Stoutberg, (09:05)

Memorable Moments & Notable Quotes

• FedEx Lawsuit Example: (02:11)
• Tomato Farm Analogy: Shows how integral work is to employer’s business (05:08–05:17)
• Distinction on Economic Dependence vs. Control: (08:40–08:55)

Timestamps for Important Segments

• Introduction & Context: 00:05–01:12
• Why Misclassification Matters: 01:46–03:16
• Historical Legal Context: 03:29–04:11
• Detailed Six-Factor FLSA Test: 04:14–05:53
• IRS & ERISA Approaches: 06:01–07:40
• Overlap and Divergence of Tests: 07:45–08:55
• Practical Employer Considerations: 09:02–09:11

Conclusion

This episode of ACTEC Trust & Estate Talk, guided by expert Lee Stoutberg, serves as a comprehensive primer on the shifting landscape of worker classification. Listeners receive up-to-date, nuanced guidance vital for legal compliance and risk management when hiring and classifying workers.