Raleigh Estate Planning and Corporate Law Attorneys

You are here: Home / Blog

Independent Contractor vs. Employee: Legal Distinctions and Implications

By

Various work arrangements exist, and sometimes there are even subcategories within each. For example, companies in Raleigh may exclusively hire employees, including part-time and full-time or salaried ones. Other North Carolina businesses may only take on independent contractors (ICs) or have a hybrid arrangement consisting of employees and ICs. As a company owner or member of upper-level management, you must realize that there are notable distinctions between the independent contractor vs. employee classifications. Continue reading below, where we’ll discuss the legal distinctions and implications associated with each.

Understanding the Legal Distinctions Between Employees and Independent Contractors

Simply put, an “employee” (sometimes referred to as a “W-2 worker”)  is someone who works directly for and under the direction of a company or a business owner.  The Code of Federal Regulations (CFR) and more specifically, 26 CFR § 31.3121(d)-1(c), spells out how the Internal Revenue Service (IRS) views a relationship as an employment relationship when the employer “has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished.” 

In contrast, an “independent contractor” (sometimes referred to as a “1099 worker” or, incorrectly and problematically, as a “1099 employee”)  is described as being free to perform his or her tasks or functions at the individual’s own discretion with regard to means and methods. Given their arrangement with the employer, ICs must report and pay their own income and self-employment taxes as compared to employees, for whom employers are required to withhold deductions from paychecks for taxes income taxes and government programs like Medicaid, Social Security, and unemployment insurance.

Workers Are Commonly Misclassified as Independent Contractors vs. Employees

Employers often misclassify their workers as “independent contractors” instead of as “employees”  without the workers’ knowledge, by having the workers fill out the wrong tax paperwork and then not making any withholdings from their paychecks. Although unlawful, employers may do this for a number of reasons, including to avoid common employer obligations, including:

  • Having to make payroll deductions: Employers must withhold taxes used to pay for government programs like Social Security, Medicaid, and unemployment, whereas that’s required of them if they have independent contractors. 
  • Offering health insurance: Per the Internal Revenue Service, under the Affordable Care Act (ACA), employers with at least 50 full-time workers must provide health insurance to at least 95% of their staff. The smaller a company is, the more likely it is that it will solely hire independent contractors or have a hybrid arrangement to avoid providing insurance.
  • Complying with minimum wage and overtime pay obligations: The N.C. Department of Labor outlines how a Fair Labor Standard Act- and Wage and Hour Act-compliant role is one where workers must be paid no less than the federal minimum wage, which corresponds with the North Carolina minimum wage, and is currently at $7.25 per hour for up to 40 hours of work and pay and a half for overtime (so hours over 40 in one week); although there are exceptions to this rule for certain exempt employees. There’s little to no oversight for pay for independent contractors.
  • Having to offer additional employment benefits: Employers with just independent contractors don’t have to worry about offering paid annual or sick leave or workers’ compensation, the latter of which is insurance that the North Carolina Industrial Commission says all employers with three or more employees must have.
  • Making contributions to retirement plans: Employers get out of paying toward a worker’s 401(k) and other types of retirement accounts if they’re not bona fide employees.

Implications Associated With Errors in Classifying Workers

Hiring employees instead of independent contractors involves extra work and added costs as an employer. However, you shouldn’t let that push you into misclassifying your workers thinking that will relieve you of obligations to purchase workers’ comp coverage, pay overtime, or comply with other governmental requirements, as there may be fines levied and back taxes due for doing so. Specifically, since 2017, the  North Carolina Industrial Commission has maintained a fully-staffed “Employee Classification Section” whose main purpose is to investigate  and then pursue those employers  who have misclassified their workers as  “independent contractors” instead of as “employees.”  Moreover, in the case of a worker getting hurt on the job, your company may be sued for damages without the protection of an insurer to cover the costs if you have misclassified that worker as an independent contractor.  

In addition, the IRS tests a multitude of factors to determine whether a worker should be classified as an employee or IC.  The U.S. Department of Labor also has its own criteria, which it has recently updated, and we recently wrote about that here.

As a law firm that assists business startups with incorporation and aids existing Raleigh companies with operational matters, Wilson Ratledge supports its clients with a wide range of matters, including workers’ comp defense. We are ready to support you with your company’s needs to ensure you don’t land on the wrong side of the law and incur unnecessary costs. Contact our law firm to schedule a consultation with a business law attorney to discuss your company’s legal needs.

Crafting a Strategic Advisory Panel To Aid With Business Growth and Wealth Management

By

Wherever you are on your journey to building wealth and a legacy, including starting or growing your business or thinking about how your business fits with your financial and estate planning, having a carefully selected team of professional advisors to answer your questions and provide you with trusted advice is critical in making wise, strategic decisions. The professionals on your advisory panel, in addition to your attorney, should include a CPA, a financial planner/wealth management advisor, and possibly a real estate professional, and they should all work together as a team.

What Role Will Each Member of Your Wealth Preservation and Growth Panel Serve

While you may have a clear understanding of what each of the professionals described above, we want to discuss how they can support you as a collective. We’ll go one-by-one and highlight how each of the uniquely trained advisors on your team can pool their expertise in helping you make informed business and wealth management decisions. 

Your CPA as Accounting and Tax Advisor

You can rely on your accountant to provide you with operational assistance such as bookkeeping and payroll compliance, as well as assistance with budgeting and financial forecasting and tax planning, reporting, and compliance. Your work with a good CPA can reduce the chances of you encountering more costly problems in the future.

Your Wealth Manager as an Investment and Financial Planner

The role of your wealth manager is not only to safeguard the wealth you already have but to help you grow your proverbial nest egg. A skilled financial advisor will know you and your objectives, and your risk tolerance, and with this insight and their experience and knowledge to help you develop investment strategies to help you achieve your desired financial outcomes.

Your Real Estate Advisor as Property Professional

For many, investing in real estate is a component of a long-term growth strategy, or you may need to find space for your business to rent. Having an  experienced real estate professional to help you navigate investment opportunities or find a home for your business can be essential in your overall plan

Your Attorney as Legal Advisor and Quarterback

From starting your business to drafting and negotiating contracts, and possibly one day selling your business or passing it on to your heirs through a comprehensive estate plan, these are just some examples of how a lawyer can counsel you and aid you in devising risk mitigation strategies, to advance your financial objectives.

Building a Strong, Strategic-Oriented Advisory Panel To Support You

When forming your panel of advisors, it’s important that each professional is a communicative and proactive member of your team. Building your collective of professionals who understand the synergy and value of teamwork to help you develop and regularly update and adapt a strategy to build the legacy you envision can take time. However, one or more of our attorneys who regularly handle business and estate planning, and asset preservation is a good starting place. 

Contact our law office, Wilson Ratledge, PLLC, to discuss how our legal team can assist you in strategically planning for your future, including preserving and growing your business and your legacy. 

What You Need To Know About the Proposed New 2024 Overtime Rule as an NC Employer

By

You might already be aware that earlier this year, on February 14, 2024, the U.S. Department of Labor (DOL) announced that it would be releasing a new rule regarding overtime in April of this year. The proposed rule, which was announced in September, 2023, would significantly increase both the minimum salary for an exempt employee, and the minimum salary for an employee to be considered “highly compensated” for purposes of that exemption from overtime pay requirements. 

While the proposed rule is being reviewed by the United States Office of Management and Budget (OMB), a division of the White House, we want to share with you specifics it’s expected to include when it is released.

What To Know About the Current Thresholds for Exempt Employee Compensation

”Exempt employees” are not required to get overtime pay (time and a half) for hours worked more than 40 in any one week. 

The minimum salary for an exempt employee is $35,568 per year, which equates to $684 weekly.

Employees making the minimum salary, in order to be exempt, must also  be employed in roles such as the following, each of which has its own guidance and requirements for proper classification:

  • Computer workers
  • Professionals with specialized expertise in a specific subject matter 
  • Administrative personnel
  • Company executives
  • Outside salespersons

The regulations contain a special rule for “highly compensated” employees who are paid total annual compensation of $107,432 or more. A highly compensated employee is deemed exempt under Section 13(a)(1) if:

  1. The employee earns total annual compensation of $107,432 or more, which includes at least $684 per week paid on a salary or fee basis (the balance can be paid through commissions, bonuses, etc.);
  2. The employee’s primary duty includes performing office or non-manual work; and
  3. The employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.

For example, an employee may qualify as an exempt highly compensated executive if the employee customarily and regularly directs the work of two or more other employees, even though the employee does not meet all of the other requirements in the standard test for exemption as an executive.

How the New Rule Is Expected To Change the Handling of Employees’ Overtime Pay

The anticipated new rule regarding overtime is expected to increase the minimum salary threshold for an exempt employee, and the threshold for the highly compensated exempt employee. The minimum salary for an exempt employee is proposed to increase by nearly $20,000 per year to $55,000 or nearly $400 weekly to $1,059 (the 35th percentile of compensation to full-time, salaried employees).  The minimum salary for the “highly compensated” employee exemption is proposed to increase from $107,432 to $143,988 (the 85th percentile of compensation to full-time, salaried employees).  In addition, the proposed rule provides for automatic updates every three years

Understanding How the Rule Review and Implementation Process Works 

The review process for regulations like these by the White House’s Office of Information and Regulatory Affairs (OIRA), a division of the OMB, is outlined in an executive order (EO). EO 12866 gives OIRA 90 days to review new rules. However, they can request an extension of that timeline. 

If the review commenced upon the DOL’s announcement of the new overtime rule in mid-February of this year is extended, it’s plausible that it may not be completed until May or even later. In other words, the previously publicized April deadline may come and go without a final announcement of this new rule occurring.

Steps To Take To Ensure Compliance With the Impending New Overtime Labor Regulation

Should the salary thresholds increase as anticipated with the announcement of the new rule, the expectation is that potentially millions of workers may be impacted by the shift in policy perhaps as soon as June of this year. It’s important to note that once rules like these are formally announced, there is, typically,  a transition period for employers to integrate new policies like these into their operations.  You will want to evaluate staff pay and their roles and responsibilities to ensure they’re properly classified. At Wilson Ratledge, we have a lengthy history of working with businesses at all stages of their operations and can help you protect your company’s interests every step of the way. So, contact our law firm to learn more, and how we can best support you.

Understanding the New Final Rule Regarding Employee and Independent Contractor Classification: Why Your Company’ Compliance Matters

By

On January 10, 2024, the U.S. Department of Labor (DOL) issued new guidance for how employees and independent contractors are classified under the Fair Labor Standards Act (FLSA). This final rule went into effect on March 11, 2024. 

As a business owner, it’s imperative that you understand this new DOL final rule regarding worker classification to ensure you don’t unnecessarily expose your company to various legal and tax liabilities for not complying with the rule. In addition to it being important to apprise yourself of this rule as a company that intends to continue operating above the law, doing so is also critical if you’re preparing to sell or raise capital for your business. 

Below, we’ll summarize what the new rule says regarding employee and independent contractor classification and address how compliance impacts your business. 

Understanding the Purpose of the DOL’s New Guidance

The new rule centers around employers applying an “economic reality test” when classifying those who work for them as either independent contractors or employees per FLSA. The latter is a federal law that was enacted in 1938 to ensure, among other protections, that workers receive the federal minimum wage or better plus overtime pay at 1.5 times their regular pay rate. 

What the New Guidance Says About the Classification of Workers

When announcing the new ruling, the DOL outlined a 6-factor test to replace the 2-factor one previously utilized by employers trying to determine worker status per FLSA. The previously used 2-part test focused on “core factors,” which were “the nature and degree of the worker’s control over the work” and “the worker’s opportunity for profit or loss based on initiative, investment, or both.” 

The new economic reality test provides that employers assess a worker’s classification  on the following six factors, without “predetermined weight” on any single one:

  1. Opportunity for Profit or Loss Depending on Managerial Skill
  2. Investments by the Worker and the Potential Employer 
  3. Degree of Permanence of the Work Relationship
  4. Nature and Degree of Control
  5.  Extent to Which the Work Performed Is an Integral Part of the Potential Employer’s Business
  6. Skill and Initiative 

As you can likely tell, there’s now more of a focus on whether you, as a company, and your potential workers are economically dependent or independent from one another. Dependence indicates your company may need to classify a worker as an employee instead of an independent contractor.

How the New Employment Classification Rule Effective March 11 Impacts Your North Carolina Business

Whether you own a business here in Raleigh or elsewhere, the next step is to take some time to review the classification of your contractors and employees as soon as possible. It’s important to do so to verify that they’re not improperly categorized under the new employee classification directive. Failing to do so could result in fines and other civil penalties you may be able to avoid. 

In addition, if you are positioning your company for possible investors or purchasers, you do want to be confident in your employee classifications when embarking on the due diligence process.

The Future Impact of Federal Guidance Like This New Worker Classification Rule

Despite being a federal agency, the DOL does not have the authority to implement and enforce laws. However, past guidance like this that it has issued has been cited by workers, employers, advocacy groups, and attorneys when filing motions in court cases and in other matters. 

It’s not uncommon for judges to be asked to consider rules like these when weighing arguments in employment-related cases. 

New rules like these also have the potential to shape future laws that are legally binding. 

Getting Answers to Operational Questions as a Business Owner

Here at Wilson Ratledge, we’ve long worked with businesses on operational matters to avoid or mitigate the consequences that come with uninformed decisions. We are here to explain this new DOL final rule more in-depth and to help you assess whether your workers are indeed classified correctly. Reach out to our law firm if you need assistance with this or any business matters. 

Corporate Transparency Act – CHALLENGED

By

On March 1, 2024, a U.S. District Judge in Alabama issued a memorandum opinion and final judgment in National Small Business United v. Yellen, finding that the Corporate Transparency Act (CTA) is unconstitutional because it exceeds the Constitution’s limits on Congress’ power.

The court permanently enjoined the FinCEN (Treasury Department’s Financial Crimes Enforcement Network) from enforcing the CTA against plaintiffs in that case.

It remains to be seen how the decision of this ruling will impact other Reporting Companies and their Beneficial Owners and Company Applicants, though we anticipate an immediate appeal by the Treasury.

At this time, there is no direct change to CTA compliance requirements, and it remains prudent practice for clients to continue to abide by the reporting requirements set forth under the Act.  Our prior memorandum (which can be found here) gives further detail about the CTA’s requirements.

Wilson Ratledge will continue to monitor the developments and its implications on the future of the CTA.