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September 30, 2024

Minute Read


Recent changes that could affect your business. New Dept. of Labor regulations impacting independent contractors and a Supreme Court ruling on buy-sell agreements involving life insurance: 

  • Does your business classify workers as independent contractors instead of employees? You should know that the U.S. Department of Labor is trying to make it harder for all businesses to use independent contractors
  • A recent U.S. Supreme Court decision could significantly impact your buy-sell agreement if it involves life insurance to redeem shares upon your death
small business update


The DOL Makes It Harder To Hire Independent Contractors

Does your business classify workers as independent contractors instead of employees? You should know that the U.S. Department of Labor is trying to make it harder for all businesses to use independent contractors.

The Department of Labor enforces the Fair Labor Standards Act (FLSA), the federal law that requires most employers to pay employees a minimum wage and non-exempt employees time-and-a-half for overtime.

The key word here is “employee.” FLSA does not apply to independent contractors. They need not be paid time-and-a-half for overtime or even the minimum wage.

The question is—who is an independent contractor?

Initially, it’s up to each business to decide how to classify workers.

However, your decision is subject to review by the Department of Labor, other government agencies such as the IRS, and your state unemployment and workers’ compensation agencies.

Bad things can happen if the government decides you’ve misclassified an employee as an independent contractor:

  • The Department of Labor can make you pay back overtime pay for two years (three years if the misclassification is intentional)
  • Your workers can also bring lawsuits for violations

For FLSA purposes, workers are employees if, as a matter of economic reality, they are economically dependent on the hiring firm.

The Department of Labor’s new test contains six factors hiring firms must consider:

  1. Opportunity for profit or loss
  2. Investment in facilities and equipment
  3. Permanency of the relationship
  4. Degree of control by the hiring firm
  5. Integration into the employer’s business
  6. Skill and initiative required

This test is complex and hard to apply. No one factor is determinative. Rather, you must examine all the circumstances of the relationship.

To make worker classification even more challenging, the Department of Labor test is only one of many:

  • The IRS, for example, uses a more business-friendly right-of-control test
  • Many states use an even stricter ABC test for workers’ compensation, unemployment, and state wage and hour law purposes
A worker can qualify as an independent contractor under the IRS test but be an employee under the Department of Labor and state ABC tests

Does this all sound like a mess? It is.

If you use independent contractors, you should review your relationship in light of the new Department of Labor test.

If your company uses many independent contractors, it should always have them sign an independent contractor agreement with a clause waiving the right to bring or join any class action suit against the company, including suing for workers’ misclassification. The clause can avoid ruinously expensive class action lawsuits brought by plaintiff’s lawyers.

Life Insurance and Buy-Sell Agreements

A recent U.S. Supreme Court decision could significantly impact your buy-sell agreement if it involves life insurance to redeem shares upon your death.

Impact on Estate Tax

The Supreme Court’s ruling in Connelly v. Internal Revenue Service established that life insurance proceeds used by a company to redeem a deceased owner’s shares increase the company’s value for estate tax purposes. This could result in a higher estate tax liability than anticipated.

Review Your Buy-Sell Agreement

If your buy-sell agreement uses company-owned life insurance for share redemption, reviewing the structure and terms with your estate planning advisor is crucial. The Connelly decision may require changes to ensure the agreement aligns with your estate planning goals.

Consider Alternative Arrangements

One potential alternative is a cross-purchase agreement, where each owner buys insurance on the others. This structure avoids increasing the company’s value with life insurance proceeds and might better align with your estate planning needs.

Time-Sensitive Considerations

Keep in mind that the current federal estate tax exemption is set to decrease after December 31, 2025. This reduction could further impact your estate planning if your buy-sell agreement is not properly adjusted.

Contact your tax and financial advisors to determine the best moves for your situation.


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