In February, the Department of Labor proposed a new set of guidelines for how employers determine whether a worker is an employee or an independent contractor. The new language, if accepted, would replace the current six factor “Totality of Circumstances” test. The proposed, more streamlined, two core factor “Economic Reality” test (there’s actually kind of five factors, but more on that in a second), designed to provide clearer (we’ll see about that) direction for employers and workers alike.

Under the current rule put in place in 2024, organizations must look at a worker’s circumstance and consider all 6 test factors with equal importance to determine the nature of that worker’s classification. This can obviously be confusing if a worker lands right in the middle of the six factors or doesn’t end up leaning strongly one way or the other.  

Under the newly proposed rule and “Economic Reality” test, the decision would focus on two core factors (meaning they carry most of the decision-making weight) in this determination:

1. The degree of control the organization has over the worker’s schedule, duties, and methods of work. The When, the What, and the How.
2. The worker’s opportunity for profit or loss based on initiative, investment, or business decision-making. Consider, is there a possibility the worker can LOSE money through this work arrangement?

I would venture to say that most any relationship with a worker can be determined by considering these two factors. Do we tell them when to work, what to do, and how we like it done? And is there any possibility that by doing this work they can lose money? Fairly straight forward-ish.

There are technically three additional factors in the proposed language to function as sort-of tie breakers, which carry less weight than the two core factors but are still necessary to consider. These are: how permanent this relationship/arrangement is, the level of skill involved or required to do the work, and whether the worker’s role is integral to the organization’s operations.

 The proposed language also emphasizes that day-to-day practices matter more than written agreements alone. Meaning, what is actually happening matters more than any written or oral agreement about what may be or should be happening. Put even simpler, what is going on in real life with the worker has more sway on their classification than the written contract no one has seen or reviewed since Pluto was still considered a planet.

Misclassifying workers can expose your church or ministry to some weighty risks, including unpaid payroll taxes, overtime claims, penalties, and back wages. Even unintentional errors can create financial and legal burdens that distract from ministry efforts.

As this proposed rule moves through the public comment process, you may benefit from reviewing your staffing arrangements to see where you land with your workers. Careful classification helps protect both the organization and its workers while supporting transparency and good stewardship.

If you have questions, we are always happy to be a resource.

The information contained in this article does not constitute legal and/or tax advice. The reader should consult qualified legal and/or tax counsel to determine how laws apply to specific situations.