Is your worker a contractor or an employee?

A Guide for Businesses

Your workers are either employees or independent contractors and understanding the difference can save you a lot of time and money.  Below, I’ve outlined the key differences under U.S. Department of Labor (DOL) regulations via the Fair Labor Standards Act (FLSA), then, for my Arkansas clients, I’ve added Arkansas variations from the Arkansas Department of Finance and Administration (DFA) and Arkansas Department of Workforce Services (DWS).

First, the Federal Perspective: U.S. Department of Labor and the FLSA - The DOL applies the "economic realities" test to assess economic dependence under the FLSA.  It emphasizes that workers who are dependent on the employer are employees, entitled to minimum wage and overtime; those in business for themselves are independent contractors. The rule, effective March 11, 2024, uses six holistic factors:

1. Opportunity for profit or loss depending on managerial skill: Workers deciding on pay or expenses indicate independence.

   
   

2. Investments by the worker and employer: Similar capital investments suggest contractor status.

   
   

3. Degree of permanence: Ongoing relationships indicate employees; Occasional, project-based work is characteristic of contractors.

   
   

4. Nature and degree of control: Employer oversight favors employee classification; autonomy favors contractors.

   
   

5. Integral part of business: Core work, the main purpose of the business, suggests employees. Occasional or supporting work is more characteristic of contractors.

   
   

6. Skill and initiative: Business-like use of skills indicates contractors. Employees typically don’t schedule or budget or administrate outside of their own core duties.

   
   

Based on this DOL guidance, here are some scenarios to illustrate the guidelines:

• Landscaping Worker (Employee): Assigned customers by the company, worker does no advertising, agrees to extra hours for pay. Factors like lack of profit/loss opportunity, low investments, permanence, and control point to employee status.

  
  

• Independent Landscaper (Contractor): Negotiates contracts, advertises services, hires helpers, chooses jobs. Managerial skill for profit, own investments, project-based work, and autonomy indicate contractor.

  
  

• Graphic Designer at Firm (Employee): Uses company-provided tools and office, minor personal supplies. Employer's investments dominate, integral role, and control suggest employee.

  
  

• Freelance Graphic Designer (Contractor): Buys own software/tools, rents space, markets independently. Capital investments, skill initiative, and non-permanent projects support contractor classification.

  
  

Now for the Arkansas Variations:  Arkansas aligns with the IRS common law test under the Empower Independent Contractors Act of 2019 (amended 2025), applying to DWS unemployment insurance and DFA tax withholding. It references 26 C.F.R. § 31.3121(d)-1 (as of January 1, 2025). For state income tax withholding, Arkansas follows federal employee definitions. The IRS test focuses on control and independence via three categories:

1. Behavioral Control: Employer instructions or training suggest employees.

   
   

2. Financial Control: Unreimbursed expenses, profit/loss opportunities indicate contractors.

   
   

3. Type of Relationship: Benefits, contracts, or permanence point to employees.

   
   

These are a bit more specific, incorporating details like multi-client work or own equipment (from IRS Revenue Ruling 87-41). Though Arkansas follows IRS guidelines (rather than DOL), similar scenarios apply, emphasizing control:

• Supervised Worker (Employee): Given a set schedule, supervised daily, provided tools by the employer. High behavioral control (instructions/supervision) and relationship (permanence, no other clients) indicate employee.

  
  

• Independent Service Provider (Contractor): Sets own hours, uses personal equipment, works for multiple clients, bears unreimbursed expenses. Financial control (profit/loss risk), low behavioral control, and contract-based relationship suggest contractor.

  
  

• Company Driver (Employee): Must follow specific routes, trained by employer, reimbursed for expenses. Behavioral and financial control point to employee.

  
  

• Owner-Operator Trucker (Contractor): Owns vehicle, chooses loads/routes, not reimbursed for costs, markets to various companies. Independence in all categories supports contractor status.

  
  

Key Differences from Federal Rules in Arkansas

• Test Used: Fed uses FLSA's economic realities, whereas Arkansas uses IRS common law.  The Arkansas tests only apply to state unemployment and withholdings but might be a little more flexible.

  
  

• Implications: DWS misclassification only affects unemployment benefits, and DFA impacts withholding taxes and penalties. While they will be rare, discrepancies are possible between Federal DOL and Arkansas rulings.

  
  

Correct classification matters. If your workers are “reclassified” by the DOL or by Arkansas, it can mean not only retroactive tax liabilities that employers have no recourse to collect from workers, but also punitive penalties and interest. 

Don’t wait for an audit – consider these guidelines carefully and contact NEA Financial Services if you would like to engage us in helping keep your worker classifications in compliance.