The use of predetermined overheads effectively incorporates the cost effects of seasonal variations in the product cost and price. If the business used the traditional costing/absorption costing system, the total overheads amounting to $26,000 will be absorbed using labor hours. Therefore, the predetermined overhead rate of GHJ Ltd for next year is expected to be $5,000 per machine hour. Therefore, the predetermined overhead rate of TYC Ltd for the upcoming year is expected to be $320 per hour. Overhead expenses are generally fixed costs, meaning they’re incurred whether or not a factory produces a single item or a retail store sells a single product.
- The additional factors section is simply a recognition by the Department, consistent with decades of case law, that a rule applying to varying economic relationships across sectors of the economy must be applied in a non-mechanical fashion and must focus on the totality of the circumstances.
- Multiple commenters supported the Department’s inclusion and description of price setting under the control factor.
- Although the Department did not intend for the “exercises managerial skill” language to be limiting, focusing on “opportunities” should capture the facts relevant to a worker’s profit or loss and managerial skill, as explained further in the discussion of comments in the following paragraph.
The first step is to estimate the amount of the activity base that will be required to support operations in the upcoming period. The third step is to compute the predetermined overhead rate by dividing the estimated total manufacturing overhead costs by the estimated total amount of cost driver or activity base. Common activity bases used in the calculation include direct labor costs, direct labor hours, or machine hours. In addition, commenters suggested that the Department should provide more examples of how current facets of the economic reality test would be applied. For instance, LeadingAge requested more examples of how the Department views reserved control and more examples regarding situations in which a worker’s ability to work for others is constrained by the number of hours or days they need to work.
Which of these is most important for your financial advisor to have?
In sum, the Department’s rulemaking to rescind and replace the 2021 IC Rule is motivated, in part, by an assessment that the guidance provided here will likely benefit workers as a whole, including those workers at risk of being misclassified as independent contractors as well as those who are appropriately classified as independent contractors. While the above modifications from the 2021 IC Rule were all proposed in the NPRM, the Department also made several adjustments to the proposed regulations after consideration of the comments received. Notably, as discussed further below, the portion of the Department’s proposal for the control factor stating that control implemented for purposes of complying with legal obligations may be indicative of control generated many comments.
- Added to these issues is the nature of establishing an overhead rate, which is often completed months before being applied to specific jobs.
- A predetermined overhead rate is calculated at the start of the accounting period by dividing the estimated manufacturing overhead by the estimated activity base.
- Regarding the economic reality factors, this final rule returns to the longstanding framing of investment as a separate factor, and integral as an integral part of the potential employer’s business rather than an integrated unit of production.
- The Department thus agrees with CWI, for example, that the proposed regulatory text missed this nuanced distinction.
However, the example of the landscaper includes a scenario where the first landscaper does not actively market their services and a second where the landscaper does market their services. The inclusion of these facts in the example does not indicate that the Department believes that traditional marketing is required for a worker to be classified as an independent contractor, only that such affirmative marketing may be probative of the worker acting how to calculate inventory purchases in a way consistent with being in business for themself. Put another way, the Department intentionally drafted the examples to avoid giving the impression that certain facts are always less or always more probative to the analysis of any given factor. Further, commenters were concerned that the same facts that point toward independent contractor status under the investment prong example would point toward employee status under the integral prong.
The Department intends for the examples to provide general guidance to regulated parties and not to be tied to the specifics of certain businesses or jobs. The examples reflect the Department’s enforcement experience in some of the most commonly occurring scenarios. For example, in contrast to the background check example in the prior paragraph, a home care agency’s extensive provider qualifications, such as fulfilling comprehensive training requirements (beyond training required for relevant licenses), may be probative of control. The Department continues to believe that control exerted by the employer to achieve these ends may be relevant to the underlying analysis of whether the worker is economically dependent on the employer, particularly where the employer dictates and enforces the manner and circumstances of compliance. In sum, nothing in this final rule forecloses consideration, in an appropriate case, of investments as they relate to the worker’s opportunity for profit or loss. Some other commenters that generally supported the Department’s six-factor analysis requested changes to or clarifications of the opportunity for profit or loss depending on managerial skill factor.
A. Relevant FLSA Definitions
This chapter will explain the transition to ABC and provide a foundation in its mechanics. The difference between the actual and predetermined amounts of overhead could be charged to expense in the current period, which may create a material change in the amount of profit and inventory asset reported. This can be avoided to some extent by regularly adjusting the predetermined overhead rate to align with actual costs. If sales and production decisions are being made based in part on the predetermined overhead rate, and the rate is inaccurate, then so too will be the decisions.
NRF & NCCR recommended that “specialized skills” be changed to “skill, talent or creativity,” referencing singers at restaurants among other examples. Again, the Department is not seeking to limit the types of work that involve skills or taking the position that any particular occupation lacks specialized skills. Instead, consistent with the bulk of case law, the Department is focusing this factor on whether the worker uses their specialized skills in connection with business-like initiative—rather than only considering whether the worker has specialized skills—because that focus is probative of the ultimate question of economic dependence. Alternatively, the same farm pays an accountant to provide non-payroll accounting support, including filing its annual tax return.
Concerns Surrounding Predetermined Overhead Rates
The Department believes that the 2021 IC Rule does not fully comport with the FLSA’s text and purpose as interpreted by the courts and, had it been left in place, would have had a confusing and disruptive effect on workers and businesses alike due to its departure from decades of case law describing and applying the multifactor economic reality test. Therefore, the Department believes it is appropriate to rescind the 2021 IC Rule and set forth an analysis for determining employee or independent contractor status under the Act that is more consistent with existing judicial precedent and the Department’s longstanding guidance prior to the 2021 IC Rule. This rule presents a detailed analysis for determining employee or independent contractor status under the Act that is more consistent with existing judicial precedent and the Department’s longstanding guidance prior to the 2021 IC Rule. This analysis will provide more consistent guidance to employers in properly classifying workers as employees or independent contractors, as well as useful guidance to workers on whether they are correctly classified as employees or independent contractors. The analysis will provide a consistent approach for those businesses that engage (or wish to engage) independent contractors, who the Department recognizes play an important role in the economy. The rule’s consistency with judicial precedent could also help to reduce legal disputes.
Moreover, such a requirement could be viewed as similar to the 2021 IC Rule’s approach of combining the consideration of investments with opportunity for profit or loss—an approach that the Department is rejecting as discussed below. For all the reasons stated herein, the Department is restoring investments as its own separate factor. Although some overlaps between factors are understandable, tying investments to profits and losses in the absolute manner suggested by NELA would be contrary to the Department’s goal of rectifying the 2021 IC Rule’s treatment of investments as part of the opportunity for profit or loss factor. In addition to the numerous comments generally supporting the Department’s six-factor analysis, a number of commenters expressed support for the NPRM’s treatment of investments as a separate factor in the economic realities analysis. Thus, irrespective of whether control and opportunity for profit or loss were more frequently aligned with the ultimate result in prior appellate cases, the new framing of these factors, as redefined in the 2021 IC Rule, set forth a new standard for analysis that is unsupported by precedent. Multiple commenters said that they were concerned that the Department’s rule familiarization cost estimate was too low.
They stated that applying this rule only to independent financial professionals would create an obligation for employers to track the earnings and hours worked for more than 140,000 independent financial professionals in the U.S. As discussed above, the Department does not believe that this rule will lead to widespread reclassification (and additional tracking of hours and earnings), and for the limited cases in which reclassification could occur, many of these costs should already be incurred by firms. For example, as a matter of good practice, firms should already be assessing the economic relationship of contractors when they engage in business with them. The Department notes that by recognizing that exclusivity weighs in favor of the worker being an employee, the Department is not stating either that independent contractors can never have exclusive relationships with other businesses or that employees who have nonexclusive relationships with employers because they work multiple jobs become independent contractors. The Department agrees that the permanence factor, like other factors in the economic reality test, is best understood in the overall context of the relationship between the parties where all relevant aspects are considered.